Part 2:

Assume that Falco Inc., as described in part 1 currently purchases the chair cushions for its lawn furniture from an outside vender for $15 per set. Falcos chief operations officer wants an analysis of the comparative costs of manufacturing these cushions to determine whether bringing the manufacturing in-house would save the company money. Additional information shows that if Falco were to manufacture the cushions, the direct materials cost would be $6 and the direct labor costs would be $4 per set. In addition, to produce the cushions, Falco would have to purchase the cutting and sewing equipment, which would add 10,000 to annual fixed costs.

Required:

1. What is the total relevant cost per year to purchase the chair cushions from the outside vendor?
2. What is the total relevant cost per year to produce the chair cushions internally?
3. What is the estimated net annual effect on operating income of producing the cushions internally rather than purchasing the cushions from the external supplier?
4. What strategic factors bear on the decision facing Falco?