Woodchuck Manufacturing produces quality tools for woodworking. Woodchuck has been forced to increase prices by about 40% over the last few years, mostly because of the increased costs of purchased components and other direct materials used in the manufacture of its products. Although Woodchuck will always have a market for its products among craftsmen who appreciate quality, the company is losing much of its business to companies manufacturing low-quality tools. Some of Woodchuck’s depart- ments are operating at about half of their usual capacity.

Chuck Woods, the company’s founder and president (and your dad’s next-door neighbor), would not allow his name to be associated with poor-quality tools. He feels that some price reductions are necessary, however, to keep sales from falling. He is concerned more about providing jobs for his employees than about earning a large profit. If sales fall much further, he will not be able to do either, however. Not a single employee has been laid off, nor has anyone received less than a full paycheck, even though many skilled machinists have pushed brooms and done odd jobs these last few months.

Recently, one of Chuck's foremen suggested that the company attempt to manufac- ture some of the components currently being purchased. Chuck and his foreman talked at great length, finally choosing to study the possibility of manufacturing a °/,-inch chuck that is used on hand drills, drill presses, and lathes. Everyone was quite excited when it was determined that the kind of equipment needed to manufacture the chuck was owned by the company and was not currently in use. Production would be no problem for the skilled machinists employed by Woodchuck.

It took about a week for Chuck’s accountant to find all the information necessary to prepare the report that follows: TYK-1 Dec. 15 Dear Chuck:
I'm sorry to report that after careful study of the costs of manufacturing °/,- inch chucks, I've concluded that we can’t afford to make them. We currently use about 1,000 chucks of this size per month and are now buying them for $6.50 each. The costs to manufacture 1,000 chucks per month would be:
PBSC G IMR AIS eed teas actorr casita valhchaotivhows argelorh cesta botnets $1,850 REN kOe soccer onus hier seo otstc lO hnt oh es se 1,900 Natla Ne NG UREA Lief Schmidt Chuck knows you are studying accounting and has asked your opinion.
Required: Prepare a brief analysis of this situation and write Chuck a letter explaining your recommendation about whether his company should make or buy this component, and whether it also would be worthwhile to consider making rather than buying other components. What other issues should Chuck consider in making his decision?