The Midwest Division of the Paibec Corporation manufactures subassemblies that are used in the corporations final products. Lynn Hardt of Midwests Profit Planning Department has been assigned the task of determining whether a component, MTR2000, should continue to be manufactured by Midwest or purchased from Marley Company, an outside supplier. MTR2000 is part of a subassembly manufactured by Midwest.

Marley has submitted a bid to manufacture and supply the 32,000 units of MTR2000 that Paibec will need for 20x1 at a unit price of $17.30. Marley has assured Paibec that the units will be delivered according to Paibecs production specifications and needs. While the contract price of $17.30 is only applicable in 20x1, Marley is interested in entering into a long-term arrangement beyond 20x1.

Hardt has gathered the following information regarding Midwests cost to manufacture MTR2000 in 20x0. These annual costs will be incurred to manufacture 30,000 units.

Direct material	$	195,000
Direct labor		120,000
Factory space rental		84,000
Equipment leasing costs		36,000
Other manufacturing overhead		225,000
Total manufacturing costs	$	660,000

Hardt has collected the following additional information related to manufacturing MTR2000.

• Direct materials used in the production of MTR2000 are expected to increase 8 percent in 20x1.
• Midwests direct-labor contract calls for a 5 percent increase in 20x1.
• The facilities used to manufacture MTR2000 are rented under a month-to-month rental agreement. Thus, Midwest can withdraw from the rental agreement without any penalty. Midwest will have no need for this space if MTR2000 is not manufactured.
• Equipment leasing costs represent special equipment that is used in the manufacture of MTR2000. This lease can be terminated by paying the equivalent of one months lease payment for each year left on the lease agreement. Midwest has two years left on the lease agreement, through the end of the year 20x2.
• Forty percent of the other manufacturing overhead is considered variable. Variable overhead changes with the number of units produced, and this rate per unit is not expected to change in 20x1. The fixed manufacturing overhead costs are expected to be the same across a relevant range of zero to 50,000 units. Equipment other than the leased equipment can be used in Midwests other manufacturing operations.

John Porter, divisional manager of Midwest, stopped by Hardts office to voice his concern regarding the outsourcing of MTR2000. Porter commented, I am really concerned about outsourcing MTR2000. I have a son-in-law and a nephew, not to mention a member of our bowling team, who work on MTR2000. They could lose their jobs if we buy that component from Marley. I really would appreciate anything you can do to make sure the cost analysis comes out right to show we should continue making MTR2000. Corporate is not aware of the material increases and maybe you can leave out some of those fixed costs. I just think we should continue making MTR2000!

Required:

1. 1-a. Calculate the total relevant cost to make MTR2000 and also to purchase it from Marley Company for 20x1. (Do not round intermediate calculations.)

1. 1-b. Based solely on the financial results, recommend whether the 32,000 units of MTR2000 for 20x1 should be made by Midwest or purchased from Marley.

A) MTR-2000 should be made by Midwest Division.

or

B) MTR-2000 should be purchased from Marley Company.