Question 2: (Make-or-Buy decision) Tower Appliances manufactures a range of products including portable air conditioners. An important component of a portable air conditioner is the exhaust tubes. Tower Appliances is considering whether to continue to make, or to purchase, 1,000 units of exhaust tubes for its outgoing model, the Wintry. These 1,000 units are required for the next 12 months before the wintry model is replaced with a new model, the Artic. The CFO of Tower Appliances, Holden Ah, has gathered the following per unit cost information of the required exhaust tubes: $ Direct labour 10 Direct materials 3 " Per unit cost 20 7 *Manufacturing overhead (MOH) is calculated as follows: Manufacturing overhead $ Allocated fixed overhead 5,000 Variable overhead 2,000 7,000 Per unit MOH based on 1,000 units 7 Holden expects that the cost of direct materials will increase by 10% next year. In addition to the above listed costs, the unusual design of the Wintry model means that company also needs to hire a special equipment to make the exhaust tubes, which costs $10,000 per year. This lease can be terminated any time if Tower Appliances pays a penalty of $2,000. Holden receives a bid from North Central Industries to manufacture 1,000 units of compatible exhaust tubes at $18 per unit, plus shipping cost of $500 to deliver these units to Tower Appliances' warehouse. Holden's brother, and Tower Appliances' General Manager, Howie, said in a meeting: "North Central is offering this low price because they are desperate for cash - I hear that they are having some financial problems. We should not pass on this opportunity to get a good deal. Besides, North Central is a big company which means we can scale up the order easily if required. Scalability is important; we get a lot of requests from customers to send them new replacement tubes because their old tube has cracked and split, even if the air conditioner is still under warranty. As you know, the air conditioners are completely useless without these tubes." Required: a) Prepare a financial analysis to show whether Tower Appliances should make these exhaust tubes or to buy them from North Central Industries. What is your recommendation if Tower Appliances' only objective is to minimise costs? b) In addition to financial consideration, what other decision criteria may be important for Tower Appliances? How would changing decision criterion away from cost minimisation affect your recommendation