Delectric is the manufacturer of a number of electric home appliances. The company at present manufactures all the required parts, but is now looking at a proposal to buy from outside the starter assembly required for its products. The annual requirement for the starter assembly is 10,000 units.

The starter assembly is currently manufactured in a separate department named M4. As per accounting statements, the following costs were incurred in M4 department last year:

Rs.

Direct Material 500,000

Direct Labour 200,000

Overhead 800,000

Total 1500,000

An outside firm Motostar has shown keen interest in supplying the starter assembly at a price of Rs. 140, the price to remain fixed for the next three years. Analysis of the M4 overhead shows that 20% of it is variable. Out of the fixed overhead, Rs. 200,000 is on account of allocation of general overhead of the company that would remain unchanged even if M4 department was closed. A further Rs. 120,000 of the fixed overhead is specific to the M4 department and avoidable if the company stops manufacturing starter assembly units. The balance of the fixed overhead represents M4 managers salary. If department M4 is closed, the manager will be transferred to M3 department at the same salary. However, if the department M4 continues to manufacture starter assembly units, the company will have to fill the vacancy in M3 from outside at a salary of Rs. 250,000 per annum.

The management has been informed that if M4 is closed, the vacated factory space can be used for storage which will save the company an annual amount of Rs. 50,000 incurred on outside storage facility. However, the M4 manager points out that this is not relevant information as the storage cost being incurred on outside facilities was never a cost related to operating his department.

Required: Performing relevant cost analysis on an annual basis, answer the following:

1. Should the company continue to make the starter assembly, or buy from outside? Show all calculations to support your answer.

2. Explain three other factors (for attention of management) that the company should consider before finalizing its make or buy decision.