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Should the company make or buy the valve

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Reference no: EM13173254

Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

                                                                                                                        Cost Per unit

                                Variable Cost:

                                Direct material                                                                     $900

                                Direct labor                                                                         $600

                                Variable Overhead                                                                $300

                                Total Variable Costs                                                                          $1800.00

                                Fixed Costs:

                                Depreciation of Equipment                                                      $500

                                Depreciation of Building                                                          $200

                                Supervisory salaries                                                               $300

                                Total Fixed Cost                                                                                  $1,000.00

                                Total overall Cost                                                                                   $2,800.00

The company has an offer from Duvall Valves to produce the part for $2,000 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas. The equipment cannot be used elsewhere in the Company, and it has no market value. However, the space occupied by the production of the value can be used by another production group that is currently leasing space for $55,000 per year.

Required: Should the company make or buy the valve?

Reference no: EM13173254

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