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Should Carlon Ltd make or buy the compressors

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Question - Carlon Ltd currently manufactures 10,000 compressors per year in one of its production lines. The variable costs per unit are $50 and the total fixed costs of this production line are $250,000 per year.

Robson Ltd has contacted Carlon Ltd with an offer to sell to it 10,000 compressors for $48 each. If the compressors are purchased from Carlon Ltd a cost of $16,000 per year would be incurred for quality control. Assume the fixed costs are unavoidable. Should Carlon Ltd make or buy the compressors? Why?

a. Make, because if buy the compressors, there is no reduction in the current fixed costs

b. Buy, because the current fixed costs will be reduced by $16,000

c. Make, because if buy the compressors, the fixed cost increased by $16,000

d. Buy, because profit would increase by $4,000

e. Make, because if buy the compressors, profit would decrease by $4,000

Reference no: EM132571754

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