Krylon Company has purchased 800 pressure gauges annually from COn, Inc. The price of these gauges has increased each year, reaching $1,000 per unit last year. Because the purchase price has increased significantly, Krylon management has asked for a cost estimate of manufacturing gauges in its own facilities.

A team of employees from the engineering, manufacturing, and accounting departments have prepared a report for management that includes the following estimate for an assembly run of 100 units.

Additional production employees will be hired to manufacture the pressure gauges. However, no additional equipment or space is needed.

The report states that total costs for 100 units are estimated at $240,000 as shown here, or $2,400 per unit.

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Required

a. Before considering the learning curve effects, was the recommendation to continue purchasing the gauges correct? Explain your answer and include any supportive calculations you consider necessary.

b. Assume that Krylon could experience labor-cost improvements on the pressure gauge assembly consistent with an 80 percent learning curve. An assembly run of 100 units represents the initial lot or batch for measurement purposes. Should Krylon produce or purchase 800 pressure gauges in this situation? Explain your answer