15-16 - 15-1615-29 Dear Chuck:This letter is in response to...

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Unformatted text preview: 15-1615-29 Dear Chuck:This letter is in response to your request for an analysis andrecommendation concerning whether Woodchuck Manufacturing should makeor buy 3/4 inch chucks, and whether it would be worthwhile to considermaking rather than buying other components.Woodchuck Manufacturing currently is purchasing 3/4 inch chucks at acost of $6.50 per chuck. Using 1,000 chucks per year costs the company$6,500. The question is whether the 1,000 chucks can be manufacturedat an incremental cost of less than $6,500.First, consider fixed overhead costs. Some of Woodchuck's departmentsare operating at about half of their usual capacity. In fact, thecompany owns, and is not currently using, the exact equipment needed tomanufacture the chuck. Since no additional plant or equipment isneeded and no additional supervisory personnel seem necessary, there islittle reason to believe that incremental fixed overhead costs will be...
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