MAKE OR BUY PROBLEM:

PC Products Inc. assembles personal computers (PCs). Some of the parts are produced by PC Products themselves in-house and some are purchased from outside vendors. The vendor for hard drives has just increased its prices by 25 percent to $100 per drive. PC Products needs 5,000 such disk drives each year. Management is studying the possibility of building these disk drives in-house. Per-unit costs to manufacture the drives in-house would be as follows:

Description of Cost		Amount Per Disk Drive
Fixed Costsall of which are committed and unavoidable and thus would remain unchanged regardless of whether the part were made in-house or purchased from an outside vendor	$100,000 total or $20 per unit ($100,000/5,000 disk drives indicated above)	$20
Variable Costs	Direct Materials	$ 38
	Direct Labor (piece-rate)	$ 24
	Variable Overhead	$ 22

Which of the following describes what PC Products should do and why? Should PC Products begin to manufacture the disk drives themselves (in-house) or continue to buy them from the outside vendor at the new $100 price (per disk drive).

		PC products should BUY from the outside vendor, because their price ($100) is less than our relevant costs to manufacture this part ($104).
		PC products should BUY from the outside vendor, because their price ($100) is more than our relevant costs to manufacture this part ($84).
		PC products should MAKE THIS PART IN-HOUSE, because the outside vendor's asking price ($100) is more than our relevant costs to manufacture this part ($84).