Outsourcing $($Make$-$or$-$Buy$)$ Decision

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 purifier follows.

Direct materials $$8\mathrm{.}00$

Direct labor $1\mathrm{.}50$

Factory overhead $7\mathrm{.}00$

Total $$16\mathrm{.}50$

These cost predictions include $$40,000$ in facility$-$level fixed factory overhead averaged over $10,000$ units.

One of the component parts of the auto air purifier is a battery$-$operated electric motor. Although the company does not currently manufacture these motors, the preceding cost predictions are based on the assumption that it will assemble such a motor. Mini Motor Company has offered to supply an assembled battery$-$operated motor at a cost of $$4\mathrm{.}50$ per unit, with a minimum annual order of $5,000$ units. If Mountain Air accepts this offer, it will be able to reduce the variable labor and variable overhead costs of the auto air purifier by $50$ percent. The electric motor's components will cost $$1\mathrm{.}00$ if Mountain Air assembles the motors.

$($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.$)$

Calculate the net advantage $($disadvantage$)$ of outsourcing the electric motors from Mini Motor Company.

Use a negative sign with your answer to indicate a net disadvantage of outsourcing $($if applicable$).$

$Answer

$($b$)$ If it could otherwise rent the motor$-$assembly space for $$28,000$ per year, should it make or outsource this component?

Calculate the net advantage $($disadvantage$)$ of outsourcing the motors, assuming the space could be rented.

Use a negative sign with your answer to indicate a net disadvantage of outsourcing $($if applicable$).$

$Answer