2. | A New York motorcycle manufacturer (Hot Rodz) has the option to make or buy tires. | |||||||||||

The annual requirement is 20,000 tires. A supplier is able to supply the tires for $100 each. | ||||||||||||

Hot Rodz estimates that it costs $6000 to prepare the contract with the supplier. To make the parts in-house, Hot Rodz must invest $50,000 in capital equipment and estimates tht the tires cost $75 each. | ||||||||||||

a. | Assuming that cost is the only criterion, use break-even analysis to determine whether Hot Rodz should make or buy the item. What is the break-even quantity and what is the total cost at the break-even point? | |||||||||||

b. | Calculate the total costs for both options at 20,000 units. What is the cost savings for choosing the cheaper option? | |||||||||||

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