Magna Corporation manufactures automobile parts. It frequently subcontracts
work to other manufacturers, depending on whether Magna’s facilities are fully
occupied. Magna 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
emission-control system:

Another manufacturer has offered to sell the same part to Magna for $21
each. The fixed overhead consists of amortization, property taxes, insurance, and
supervisory salaries.

All the fixed overhead would continue if Magna bought the component
except that the costs of $100,000 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 the parts be made or bought?
Show computations.
2. Assume that the capacity now used to make parts will either (a) be
rented to a nearby manufacturer for $65,000 for the year or (b) be used
to make oil filters that will yield a profit contribution of $200,000.
Should part EC113 be made or bought? Show computations.

Transcribed Image Text:

Direct materials Direct labour Variable factory overhead Fixed factory overhead Total manufacturing costs TOTAL COST FOR 50,000 UNITS $ 400,000 300,000 COST PER UNIT $ 8 6 150,000 3 300,000 6 $1,150,000 $23