Steve Rothel Needs to Decide Research Proposal

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086 per foot. Welding gas and welding wire are $0.031 and $0.156 per foot respectively. The steel cost is $4.50 per foot. Overhead costs are not included in the calculation as they are not incremental cash flows. Only incremental cash flows should be included -- arbitrary overhead allocations are irrelevant. Whether made in house or purchased, the pipes cost will eventually contribute to the company's fixed costs, but it is not appropriate to consider this as this stage. The total cost per foot of $5.77.

However, there is a wild card to the costs. The cost of joining two eight-foot pipes to make a longer pipe is $9.78 in labor costs per long pipe. There are "many" of these in the project. It is not known how many, but even if we assume that one of these joints will be required for every two pipes, that only adds $0.62 to the cost of the pipe.

The cost of making the pipe is clearly lower than the cost of buying the pipe.

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Krause's variable cost of pipe is $5.77, escalating to at most $6.39 per linear foot. The supplier is offering $18 per linear foot.

Rothel must decide between the cheaper option (making) and the most reliable option (buying). Both options contain an element of uncertainty. The supplier of pipe is a relatively unknown entity with whom Krause has no prior business relationship. Krause trades on its reputation for quality and would essentially be putting that reputation into the hands of another company. However, Krause may not be able to deliver quality either.

Rothel should choose to make the pipe. The cost differential is substantial. Given that Krause can control its quality because the pipes are being made in house, there….....

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