Exercise 8-51. Keep or Buy, Sunk Costs Objective 1, 2 Heather Alburty purchased a previ- ously owned, 2004 Grand Am for $8,900. Since purchasing the car, she has spent the following amounts on parts and labor: New stereo system $1,200 Trick paint 400 New wide racing tires 800 Total $2,400 Unfortunately, the new stereo doesn't completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transporta- tion. Heather estimates that the needed repairs include the following:Transmission overhaul $2,000 Water pump 400 Master cylinder work 1.100 Toral $3.500 In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for $9,400. Heather has advertised and found that she can sell the Grand Am for only $6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am. Required: 1. Conceptual Connection In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she al- ready has spent $11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern? 2. Conceptual Connection Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am? Use the following information for Exercises 8-52 and 8-53: Blasingham Company is currently manufacturing Part Q108, produc- ing 35,000 units annually. The part is used in the production of several products made by Blasingham. The cost per unit for Q108 is as follows: Direct materials $ 6.00 Direct labor 2.00 Variable overhead 1.50 Fixed overhead 3.50 Total $13.00Exercise 8-52. Make or Buy Oblectlvez Refer to the information for Blasingham Company above. Of the total fixed overhead assigned to Q108, $77,000 is direct fixed overhead (the lease of pro- duction machinery and salary of a pro- duction line supervisorneither of which will be needed if the line is dropped). The remaining fixed overhead is common fixed overhead. An outside supplier has offered to sell the part to Blasingham for $11. There is no alterna- tive use for the facilities currently used to produce the part. Required: 1. Conceptual Connection Should Blasingham Company make or buy Part Q108? 2. What is the most that Blasingham would be Willing to pay an outside supplier? 3. If Blasingham buys the part, by how much will income increase or decrease? Exercise 8-53 Make or Buy