Henderson Equipment Company has produced a pilot run of 50 units of a recently developed cylinder used in its finished products. The cylinder has a one-year life, and the company expects to produce and sell 1,650 units annually. The pilot run required 14.25 direct labor-hours for the 50 cylinders, averaging 0.285 direct labor-hours per cylinder. Henderson has experienced an 80 percent learning curve on the direct labor-hours needed to produce new cylinders. Past experience indicates that learning tends to cease by the time 800 parts are produced.

Henderson’s manufacturing costs for cylinders follows:

Direct labor.......... $12.00 per hour

Variable overhead .......10.00 per hour

Fixed overhead ........16.60 per hour

Materials .............4.05 per unit

Henderson has received a quote of $7.50 per unit from Lytel Machine Company for the additional 1,600 cylinders needed. Henderson frequently subcontracts this type of work and has always been satisfied with the quality of the units produced by Lytel.

Required

1. If Henderson manufactures the cylinders, determine

a. The average direct labor-hours per unit for the first 800 cylinders (including the pilot run) produced. Round calculations to three decimal places.

b. The total direct labor-hours for the first 800 cylinders (including the pilot run) produced.

2. After completing the pilot run, Henderson must manufacture an additional 1,600 units to fulfill the annual requirement of 1,650 units. Without regard to your answer in requirement 1, assume that

• The first 800 cylinders produced (including the pilot run) required 100 direct labor-hours.

• The 800th unit produced (including the pilot run) required 0.079 hour.

Calculate the total manufacturing costs for Henderson to produce the additional 1,600 cylinders required.

3. Determine whether Henderson should manufacture the additional 1,600 cylinders or purchase them from Lytel. Support your answer with appropriate calculations.

(CMA Adapted)