Xyon Company purchases 10,000 pumps annually from Kobec, Inc. Because the price keeps increasing and reached $88 per unit last year, Xyon’s management has asked for a cost estimate to manufacture the pump internally. Xyon makes stampings and castings and has little experience with products that require assembly.

The engineering, manufacturing, and accounting departments have prepared a report for management that includes the following estimate for an assembly run of 10,000 pumps. To manufacture the pumps Xyon will hire additional production employees but will need no additional equipment, space, or supervision. The report estimates that total costs for 10,000 units are estimated at $1,200,000, or $120 a unit. The current purchase price is $88 a unit, so the report recommends the continued purchase of the product. If the pumps are purchased, the currently unused space could be leased for $150,000 annually.

CONMPOMEMESssiernutswerre annem saeemer neue paennece seas ance ane eee Med a eee en $ 270,000 ASSES IY IAD ONS es 2. cee ee EOE, eee 290,000 Share of existing facility costs based On labOr..........cceceeeee 640,000 TOLAICOSTS ecco aise etter Orn har de enc Phen gee ee ent neem eee $1,200,000

“Assembly labor consists of hourly production workers.

Required

a. Was the analysis prepared by Xyon Company’s engineering, manufacturing, and accounting departments and their recommendation to continue purchasing the pumps correct? Explain your answer and include any supporting calculations that you consider necessary.

b. Present several benefits and problems of dealing with outside suppliers such as Kobec, Inc