Insert A Barsha Bohara Draw Design Layout References Mailings View Help Share Www De TO 2 1 be Raya Share the site Mwa N Question 2: (20 marks) ABC is an air-purifier fan model manufactured by PureAir Limited. The company expects to sell 14,000 units of ABC model in the coming year. The model requires a thermostat component which allows the fan to automatically work upon a pre-set temperature. PureAir has had an internal production division manufacturing the thermostat component in-house. However, the senior managers are considering outsourcing this component to an external supplier The purchase decision would eliminate all variable costs but some of the fixed costs. Allocated costs will have to be absorbed by other production departments. Variable manufacturing costs to produce each thermostat component were: Direct materials per unit: $9 Direct labour per unit $7.20 Indirect labour per unit: $0.99 Utilities per unit: $0.90 Fixed manufacturing costs to produce each thermostat component were: Cost item Direct Allocated Depreciation $4.950 $4,050 Property taxes 2.250 900 Insurance 4,275 2,025 Mechanica Limited has offered PureAir a quote to purchase a similar thermostat component with the following information: 1. The lowest quotation for 14,000 units of thermostat component is $294.000 2. freight and inspection costs would be 0.60 per unit, receiving costs of $4,200 per year would be incurred by Pyson 3. If the thermostat components are purchased on an ongoing basis, one of Pyson's manufacturing plants would be closed. The facilities would be rented out to produce a net income of $27.000 per year. If the thermostat components are purchased on an ongoing basis, a machine operator from the plant will be transferred to the purchasing department (the employee's salary is $60,000) 4 Required: a) Should PureAir Limited continue to produce the thermostat in-house or purchase the component from Mechanica? Justify your answer with an appropriate incremental analysis. 114 marks) Click or tap here to enter text. b) What qualitative factors or strategic issues should the senior management consider in making this make-or-buy decision? [6 marks)