Backyard Environments Produces a Water Fountain for Use in Residential

Multiple Choice

Backyard Environments produces a water fountain for use in residential gardens. It currently purchases the small water pump used in the fountain from an outside supplier at a cost of $2 per pump. The company makes and sells 2 million of the fountains per year. The company's vice president of manufacturing has been considering a proposal to produce the pumps internally. The machinery needed to produce the pumps could be purchased for $20,000. The machine would have a useful life of four years. It would require two workers paid $20 per hour to operate it for 2,000 hours per year. The factory space needed to accommodate the new machine would displace another production department that would be required to lease outside space at an annual cost of $195,000. Materials would cost $1.75 per pump. Additional overhead would amount to 25% of labor cost. For the purpose of the make-or-buy decision, what is the relevant unit cost to produce the pumps internally?

A) $1.90 per pump.
B) $1.80 per pump.
C) $1.8025 per pump.
D) $1.79 per pump.