Akawasi Sudawa is a production manager for HAL, a firm that specializes in manufacturing high-precision aircraft components. For a new product, Akawasi is trying to decide whether his company should make a particular component internally or whether he should buy it from an outside supplier. In either case, HAL would supply all of the needed materials and connectors to ensure that the finished component meets quality standards. Akawasi expects the supplier to use 5% more in materials than HAL would for in-house manufacturing because the supplier would not have access to the same specialized machines as HAL does. However, the number of connectors used would be the same under both options. Finally, the status quo of doing nothing is not feasible—HAL will either make or buy the component.

Required:

a. Classify:

(1) The cost of the materials used to make the components,

(2) The cost of the connectors used to make the components, and

(3) Akawasi’s annual salary of $105,000 as being controllable (C) or noncontrollable (NC), and relevant (R) or not relevant (NR) for the above decision. Provide a brief rationale for each of your classifications.

b. Assume the status quo of not doing anything is a viable option. That is, HAL does not have to make or buy the component—it can choose to do neither. How does this change in the opportunity set affect your classifications in part (a)?

c. Assume HAL currently makes the component internally. Thus, the status quo is the “make” option as this represents the existing state of affairs. How does this change affect your classifications in part (a)?