Lehr is a global manufacturer of highly engineered products that serve industrial, vehicle, construction, commercial, aerospace and semiconductor markets. Lehr’s sales last year were €10.3 billion. It frequently subcontracts work to other manufacturers, depending on whether Lehr’s facilities are fully occupied. Suppose Lehr is about to make some final decisions regarding the use of its manufacturing facilities for the coming year. The following are the costs of making part EC113, a key component of an emissions control system:

Another manufacturer has offered to sell the same part to Lehr for €20 each. The fixed overhead consists of depreciation, property taxes, insurance and supervisory salaries. All the fixed overhead would continue if Lehr bought the component except that the cost of €150,000 pertaining to some supervisory and custodial personnel could be avoided.

1. Assume that the capacity now used to make parts will become idle if the parts are purchased.

Should Lehr buy or make the parts? Show computations.

2. Assume that the capacity now used to make parts will either

(a). be rented to a nearby manufacturer for €75,000 for the year or

(b). be used to make oil filters that will yield a profit contribution of €100,000. Should Lehr buy or make part EC113? Show your computations.

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Direct materials Direct labour Variable factory overhead Fixed factory overhead Total manufacturing costs Total cost for 50,000 units Cost per unit € 400,000 € 8 250,000 5 150,000 3 300,000 €1,100,000 6 €22