Boston Executive, Inc., produces executive limousines and currently manufactures the mini-bar inset at these costs:

The company received an offer from Elite Mini-Bars to produce the insets for $2,100 per unit and supply 1,000 mini-bars for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased.

The specialized equipment cannot be used and has no market value. However, the space occupied by the minibar production can be used by a different production group that will lease it for $55,000 per year. Should the company make or buy the mini-bar insert?

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Variable costs: Direct material Direct labor Variable overhead Total variable costs Fixed costs: Depreciation of equipment Depreciation of building Supervisor salaries Total fixed costs Total cost Cost per Unit $ 950 650 300 $1,900 500 200 300 1,000 $2,900