Reference no: EM132484738

Point A) A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier for $2 per chain. The plant manager believes their direct in-house productions costs to make their own chains is $1.50 per chain. Machinery to manufacture would cost $250,000 and would be obsolete in 10 years. They would use straight-line depreciation for tax purposes to $0 and then can be sold for scrap for $20,000. Estimation from the plant manager that it would take $50,000 for inventory. Using important formulas and theories within the book, should they continue to outsource or should they manufacture their own chains?

Question 1: What are the pros and cons of each?

Question 2: What would your recommendation be?

Question 3: This part is an optional part of A: If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Point B) On February 9, 2006, XM Satellite announced a three-year, $55 million deal with Oprah Winfrey. The announcement stated that "Oprah and Friends," a new channel on XM, would begin broadcasting in September 2006.

Question 1: What was the change in XM's market value from January 30, 2006, through February 13, 2006?

Question 2: Does the $55 million investment appear to have been a good idea?

Question 3: What other industries tend to pay exuberant salaries to their employees? Is it good for business? Why or why not?