Krylon Company purchases special tools from CO., Inc. each year that have increased in price to $100,000 per unit last year. Krylon management asked for an estimate to produce the tools internally. An analysis estimates the cost to produce the first tool as $120,000, but overhead and administrative costs would remain unchanged. The report recommends continuing to purchase from CO., Inc. since the current price is $100,000 per unit.

1. Krylon Company purchases eight special tools annually from CO., Inc. The price of these tools has
increased each year, reaching $100,000 per unit last year. Because the purchase price has
increased significantly, Krylon management has asked for a cost estimate to produce the tools in
its own facilities.
A team of employees from the engineering, manufacturing, and accounting departments has
prepared a report for management that includes the following estimate to produce the first unit.
Additional production employees will be hired to manufacture the tools. However, no additional
equipment or space will be needed.
The report states that total incremental costs for the first unit are estimated to be $120,000, as
shown here:
Overhead and administrative costs are not affected by producing this tool.
The current purchase price is $100,000 per unit, so the report recommends that Krylon continue to
purchase the product from CO., Inc.
Required:
a. Complete the table below to determine the average cost of a tool for the production of 1 to 8
units. Assume that Krylon could experience labor-cost improvements on the tool production
consistent with an 80 percent learning curve. (Note that the 80 percent learning rate coefficient is
0.3219.) (Do not round intermediate calculations. Round your final answers to 2 decimal
places.)
b. Should Krylon produce or purchase its annual requirement of eight tools?
multiple choice
Krylon should produce the tool itself.
Krylon should purchase the tool.
Materials $ 40,000
Direct labor, consisting entirely
of hourly production workers
(varies with production volume)
80,000