Amazing Sprockets,Inc.usually pays $1,000 for a million flanges,which it uses as inputs in the manufacture of sprockets.It also spends an average of $20 per million flanges looking for manufacturers and negotiating contracts.The firm can make its own flanges at a cost of $980 per million.Given these costs,we can conclude that the firm should _____

Question

Quizplus · Accepted Answer

It is more cost-effective for the firm to manufacture its own flanges at a cost of $980 per million rather than paying $1,000 per million to contract out for them. Therefore, the firm should start to manufacture its own flanges. The additional $20 spent on finding and negotiating contracts is irrelevant to this decision. There is no indication that increasing the use of flanges in the production of sprockets or decreasing the price of sprockets is necessary or beneficial.