Final answer:
Chapman company must evaluate the profitability of in-house production of widgets versus purchasing from Embree company at $125,000 for 100,000 units. The cost analysis includes comparing costs per widget produced in-house and the selling price offer from Embree.
Step-by-step explanation:
The question pertains to a business scenario where Chapman company manufactures widgets and is evaluating a purchase proposal from Embree company. Chapman needs to assess the cost-effectiveness of producing 100,000 widgets in-house versus purchasing them at a total selling price of $125,000 from Embree.
For example, if a Chapman company worker can produce two widgets per hour at a wage of $10, the cost to manufacture one widget would be $5. Given that each widget sells for $4, this would result in a loss for Chapman if produced in-house.
In contrast, if the company decides to purchase the widgets from Embree at $1.25 each (total $125,000 for 100,000 units), it would need to sell them at a higher price to make a profit or find it more cost-effective, depending on their internal production costs.