Thomas Corporation makes bicycles. It has always purchased its bicycle tires from the Firelock Company at $12 each, but is currently considering making the tires in its own factory. The estimated costs per unit of making the tires are as follows:
Direct materials.......... $3
Direct labor............ $4
Variable manufacturing overhead... .. $1
The company’s fixed expenses would increase by $28,000 per year if managers decided to make the tire.
a. Ignoring qualitative factors, if the company needs 5,000 tires a year, should it continue
to purchase them from Firelock or begin to produce them internally?
b. What qualitative factors should Thomas consider in making this decision?