Reference no: EM132605825

Question - Make or Buy

Stevensun Motors uses 15 units of Part No. T315 each month in the production of large diesel engines. The cost to manufacture one unit of T315 is presented as follows:

Direct Materials $2,000

Materials handling (10% of direct materials cost) 200

Direct labor 18,000

Manufacturing overhead (150% of direct labor cost) 27,000

Total Manufacturing Cost $47,200

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. Stevensun's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Smith Castings, one of Stevensun's reliable vendors, has offered to supply T315 at a unit price of $30,000

1. If Stevensun Motors purchases the 15 T315 units from Smith Castings, the capacity Stevensun used to manaufacture these parts would be idle. Should Stevensun make or buy the component? What is the cost difference per unit to buy the part?

2. Assume Stevensun Motors is able to rent all idle capacity for $50,000 per month. If Stevensun decides to purchase the 15 units from Smith Castings, what is Stevensun's change in monthly cost for T315?

3. Assume the rental opportunity does not exist and Stevensun Motors could use the idle capacity to manufacture another product that would contribute $84,000 per month. If Stevensun chooses to manufacture the 15 T315 units in order to maintain quality control, what is Stevensun's opportunity costs?