Reference no: EM132524264

Magna International Inc., based in Aurora Ontario is a global engineer and manufacturer of highly advanced vehicles and automotive parts. Magna's 2009 sales were $US 23.7 billion. It frequently subcontracts work to other manufacturers, depending on whether its facilities are fully occupied, according to its "Flex Plant" concept. Suppose Magna is about to make some final decisions regarding the use of its manufacturing facilities for the coming year.

The following are the costs of making part EC113, a key component of an emissions control system:

(Total Cost For 50,000 Units, Cost per Unit

Direct Materials $400,000, $8

Direct Labour 250,000. $5

Variable factory overhead 150,000, $3

Fixed factory overhead 300,000, $6

Total Manufacturing costs $1,100,000, $22

1. Another manufacturer has offered to sell the same part to Magna for $20 each.
2. Magna's fixed overhead consists of depreciation, property taxes, insurance and supervisory salaries.
3. All the fixed overhead would continue if Magna bought the component except that the cost of $150,000 pertaining to some supervisory and custodial personnel could be avoided.

Required:

Question 1: Assume that the capacity now used to make parts will become idle if the parts are purchased. Should Magna make or buy part EC 113? Show all detailed calculations.

Question 2: Assume that the capacity now used to make parts will either:

a. Be rented to a nearby manufacturer for $75,000 for the year, or;

b. Be used to make oil filters that will yield a profit contribution of $100,000.

Should Magna make or buy part EC 113? Show all detailed calculations.