Make-or-buy, relevant costs, and opportunity cost Fab Motors has manufactured compressor parts at its plant in Pitcairn,

Question:

Make-or-buy, relevant costs, and opportunity cost Fab Motors has manufactured compressor parts at its plant in Pitcairn, Indiana, for the past 25 years. An outside supplier, Superior Compressor Company, has offered to supply compressor model C38 at a price of $200 per unit. Current unit manufacturing costs for C38 are as follows:

Direct materials........ $80

Direct labor.......... 60

Variable overhead........ 56

Fixed overhead.......... 17

Total costs.......... $213

Required

(a) Should Superior Compressor’s offer be accepted if the Pitcairn plant is presently operating below capacity?

(b) What is the maximum acceptable purchase price if the plant facilities are fully utilized at present and if any additional available capacity can be deployed for the production of other compressors?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...