Gaba Manufacturing purchases a key component of one of its products from a local supplier. The current purchase price is $1600 per unit. Efforts to standardize parts succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 250 to 750 units. Management wonders whether it is time to make the component in-house rather than to continue buying it from the supplier. Fixed costs would increase by about $38,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1,000 per unit, and labor costs would be $250 per unit produced.
a. Should Gaba make rather than buy?
b. What is the break-even quantity?
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