Question:
(Outsourcing) The Air Ride Shoe Company manufactures various types of shoes for sports and recreational use. Several types of shoes require a built-in air pump. Presently, the company makes all of the air pumps it requires for production. However, management is presently evaluating an offer from Aire Supply Co. to provide air pumps at a cost of $3 each. Air Ride management has estimated that the variable production costs of the air pump are $2.50 per unit The firm also estimates that it could avoid $20,000 per year in fixed costs if it purchased rather than produced the air pumps.
a. If Air Ride requires 20,000 pumps per year, should it make them or buy them from Aire Supply Co.?
b. If Air Ride requires 60,000 pumps per year, should it make them or buy them?
c. Assuming all other factors are equal, at what level of production would the company be indifferent between making and buying the pumps?