EXERCISE $7-12.$ Make$-$or$-$Buy Decision $[$LO $1,2]$ Imperial produces whirlpool tubs. Currently

the company uses internally manufactured pumps to power water jets. Imperial has found that

$40$ percent of the pumps have failed within their $12-$month warranty period, causing huge war$-$

ranty costs. Because of the company's inability to manufacture high$-$quality pumps, manage$-$

ment is considering buying pumps from a reputable manufacturer that also will bear any related

Exercises $283$

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 can purchase

pumps for $$85$ per pump.

REQUIRED

During $2017,$ Imperial 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?