A) A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier for $2 per chain. The plant manager believes their direct in-house production costs to make their own chains are $1.50 per chain. Machinery to manufacture would cost $250,000 and would be obsolete in 10 years. They would use straight-line depreciation for tax purposes to $0 and then can be sold for scrap for $20,000. Estimation from the plant manager that it would take $50,000 for inventory.

1. Using important formulas and theories within the book, should they continue to outsource or should they manufacture their own chains?

2. What are the pros and cons of each?

3. What would your recommendation be?