(Make-or-buy decision) The Pneu 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 the air pumps it requires for pro¬ duction. However, management is evaluating an offer from Aire Supply Com¬ pany to provide air pumps at a cost of $6 each. Pneu Shoe Company management has estimated that the variable production costs of the air pump are $5 per unit. The firm also estimates that it could avoid $40,000 per year in fixed costs if it purchased rather than produced the air pumps.

a. If Pneu Shoe Company requires 20,000 pumps per year, should it make them or buy them from Aire Supply Company?

b. If Pneu Shoe Company 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?

LO1