=+8-37 KK Make versus buy, activity-based costing, opportunity costs OBJECTIVES 2, 4 Scoot Ltd manufactures motorised scooters. Currently, the company produces 5000 units. Scoot Ltd makes the motor for their motorised scooter range in batches of 500 units (i.e. 10 batches for 5000 units). The equipment used to make the motors is rented from Motor Mania. Inspection, set-up and materials-handling costs vary with the number of batches. The costs for making 5000 motors are as follows:

Cost per unit Costs for 5000 units Direct materials $4.00 $20 000 Direct manufacturing labour 2.00 10 000 Variable manufacturing overhead (utilities) 1.50 7 500 Inspection, set-up, materials handling 1 000 Equipment rental 1 500 Allocated fixed costs of factory overhead 15 000 Total costs $55 000 Chapter 8: Decision making and relevant information 337 M08_HORN3377_02_LT_C08.indd 337 2/09/13 3:42 PM Motor Mania is offering to supply the motors required by Scoot Ltd at $8.20 each. Deciding to take up the Motor Mania offer will mean that Scoot Ltd has no need to rent the motor-making equipment.

Required 1 If Scoot Ltd takes up Motor Mania’s offer, the facility where the motors are currently manufactured will be idle. At the expected production and sales volume of 5000 units, calculate the total relevant costs of buying the motor from Motor Mania. On the basis of financial considerations alone, should Motor Mania’s offer be accepted?