Question
E16-23 Outsourcing (Make-or-Buy) Decision (LO1,2,3) Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air
E16-23 Outsourcing (Make-or-Buy) Decision (LO1,2,3) | |
Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the | |
possible production of an air purifier for automobiles. Based on an annual volume of 10,000 units, the | |
predicted cost per unit of an auto air pruifier follows. | |
Direct materials | $8.00 |
Direct labor | 1.5 |
Factory overhead | 7 |
Total | $16.50 |
These cost predictions include $50,000 in fixed factory overhead averaged over 10,000 units. | |
The completed air purifier units include a battery-operated electric motor, which Mountain Air | |
assembles with parts purchased from an outside vendor for $2.00 per motor. Mini Motor Company has | |
offered to supply an assebled battery-operated motor at a cost of $5.00 per unit, with a minimum | |
annual order of 5,000 units. If Mountain Air accepts this offer, it will be able to reduce the variable labor | |
and varaiable overhead costs of the auto air purifier by 50 percent. | |
Required: | |
a. Determine whether Mountain Air should continue to make the electric motor or outsource it from | |
Mini Motor Company. (Hint: analyze the relevant costs of making the "motors," not the entire air | |
purifier.) | |
b. If it could otherwise rent the motor-assembly space for $20,000 per year, should it make or | |
outsource this component? |
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