EXERCISE 7-12. Make-or-Buy Decision. Imperial Corp. produces whirlpool tubs. Currently the company uses internally manufactured pumps to power water jets. Imperial Corp. has found that 40 percent of the pumps have failed within their 12-month warranty period, causing huge warranty costs. Because of the company’s inability to manufacture high-quality pumps, management is considering buying pumps from a reputable manufacturer that also will bear any related warranty costs. Imperial’s unit cost of manufacturing pumps is $80 per unit, which includes $18 of allocated fixed overhead (primarily depreciation of plant and equipment). Also, the company has spent an average of $20 (labor and parts) repairing each pump returned. Imperial Corp. can purchase pumps for $85 per pump. Required During 2014, Imperial Corp. plans to sell 15,000 whirlpools (requiring 15,000 pumps). Determine whether the company should make or buy the pumps and the amount of cost savings related to the better alternative. What qualitative factors should be considered in the outsourcing decision?
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