Problem - Make or Buy
In the production of its extreme fifth wheel trailer and heavy duty travel trailer, Thor Motor Coach uses 1,000 units of Part No. AMZ090 each month. The cost to manufacture one unit of AMZ090 is presented as follows:
Direct Materials	$180
Materials handling (15% of direct materials cost)	27
Direct labor	90
Manuracturing overhead (150% of direct labor cost)	135
Total Manufacturing Cost	$432
Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. Thor Motor Coach's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Kohree Castings, one of Thor Motor Coach's reliable vendors, has offered to supply AMZ090 at a unit price of $320
1. If Thor Motor Coach purchases the 1,000 AMZ090 units from Kohree Castings, the capacity Thor Motor Coach used to manufacture these parts would be idle. Should Thor Motor Coach make or buy the component? What is the cost difference per unit to buy the part?
2. Assume Thor Motor Coach is able to rent out the space used to make the component for $50,000 per month. If Thor Motor Coach decides to purchase the 1,000 units from Kohree Castings, what is Thor Motor Coach's change in monthly cost for AMZ090?
3. Assume the rental opportunity does not exist. What is the maximum price Thor Motor Coach would be willing to pay Kohree Castings if Thor Motor Coach requires a $10,000 savings a month before buying from an outside vendor?