HARTSELL MANUFACTURING has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. HARTSELL MANUFACTURING has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. HARTSELL MANUFACTURING needs 460,000 of these units each year.

If HARTSELL MANUFACTURING decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. HARTSELL MANUFACTURING uses approximately 500 of these units each year. The cost of the unit is $12.66. To aid in the production of this unit, HARTSELL MANUFACTURING would need to purchase a new machine at a cost of $2,345, and the cost of producing the units would be $9.90 a unit.

Given the information above:

(a) Without considering the possibility of making the timing unit, evaluate whether HARTSELL MANUFACTURING should buy or continue to make the small fitting.

(b) (1) What is HARTSELL MANUFACTURING opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit? (2) Would it be wise for HARTSELL MANUFACTURING to buy the fitting and manufacture the timing unit? Explain.