Make or Buy Decision

A firms manager must decide whether to make or buy a certain item used in the production of vending machines. Cost and volume estimates are as follows:

Make Buy

Annual fixed cost $150,000 None

Variable cost per unit $60 $80

Annual volume (units) 12,000 12,000

The fixed cost relates to rent that would be incurred on facilities and equipment if the make option is chosen. This cost would not be incurred if the buy option is chosen.

Given these numbers, should the firm make or buy this item? Show your work!