Reference no: EM131806299
Outsourcing (Make-or-Buy) Decision (LO1,2,3)
Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air purifier for automobiles. Based on an annual volume of 10,000 units, the predicted cost per unit of an auto air pruifier follows.
Direct materials $8.00
Direct labor 1.5
Factory overhead 7
Total $16.50
These cost predictions include $50,000 in fixed factory overhead averaged over 10,000 units. The completed air purifier units include a battery-operated electric motor, which Mountain Air assembles with parts purchased from an outside vendor for $2.00 per motor. Mini Motor Company has offered to supply an assebled battery-operated motor at a cost of $5.00 per unit, with a minimum annual order of 5,000 units. If Mountain Air accepts this offer, it will be able to reduce the variable labor and varaiable overhead costs of the auto air purifier by 50 percent.
Required:
a. Determine whether Mountain Air should continue to make the electric motor or outsource it from Mini Motor Company. (Hint: analyze the relevant costs of making the "motors," not the entire air purifier.)
b. If it could otherwise rent the motor-assembly space for $20,000 per year, should it make or outsource this component?