Learning Curves: Xyon Company has purchased 80,000 pumps annually from Kobec, Inc. The price has increased each year, and it reached $68 per unit last year. Because the purchase price has increased significantly, Xyon management has asked that an estimate be made of the cost to manufacture pumps in its own facilities. Xyon's products consist of stampings and castings. The company has little experience with products requiring assembly.

The engineering, manufacturing, and accounting departments have prepared a report for management that included the estimate shown below for an assembly run of 10,000 units. Additional production employees would be hired to manufacture the subassembly. However, no additional equipment, space, or supervision would be needed.

The report states that total costs for 10,000 units are estimated at $957,000 or $95.70 a unit. The current purchase price is $68 a unit, so the report recommends a continued purchase of the product

Required:

a. Was the analysis prepared by the engineering, manufacturing, and accounting departments of Xyon Company and the recommendation to continue purchasing the pumps, which followed from the analysis, correct? Explain your an- swer and include any supportive calculations you consider necessary.

b. Assume Xyon Company could experience labor cost improvements on the pump assembly consistent with an 80 percent learning curve. An assembly run of 10,000 units represents the initial lot or batch for measurement purposes. Should Xyon produce the 80.000 pumps in this situation? Explain your answer.

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Components (outside purchases) Assembly labora Factory overheadb General and administrative overhead Total costs Fixed overhead Variable overhead Factory overhead rate Assembly labor consists of hourly production workers. $120,000 300,000 450,000 87,000 $957,000 50% of direct labor-dollars 100% of direct labor-dollars 150% of direct labor-dollars Factory overhead is applied to products on a direct labor-dollar basis. Variable overhead costs vary closely with direct labor-dollars. General and administrative overhead is applied at 10 percent of the total cost of materials (or compo- nents), assembly labor, and factory overhead.