Make or buy decision with opportunity cost Shippley Company makes inboard-out- board engines for boats. Currently the company makes all parts for the engines, but recently Shippley received an offer to supply the engine blocks used to make the engines for a price of $190 each. Current year production data for production of the engine blocks are as follows:

The unit cost of engine blocks is $255 ($510,000/2,000 units).
If engine blocks are purchased, all of the variable costs can be eliminated and 20 percent of the fixed overhead cost can be eliminated. The space used to produce the engine blocks can be leased to another company for $60,000 a year. Additional fixed cost of $15,000 will be incurred if the facilities are leased. In addition, eight employees would lose their jobs. The company expects to make 2,500 engines during the next year. The production capacity will handle the increase in output without any increase in fixed costs.

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Units produced Total costs: Direct materials Direct labor Manufacturing overhead (30 percent variable) Total manufacturing costs 2,000 $145,000 165,000 200,000 $510,000