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 | $8.00 |
Direct labor | 1.50 |
Factory overhead | 7.00 |
Total | $16.50 |
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 $4.50 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 $1.00 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.
Calculate the net advantage (disadvantage) of outsourcing the electric motors from Mini Motor Company.
(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.
(c) Management should consider which of the following nonquantitative factors in deciding whether to make or buy the motors.
The quality of their own and the supplier's motors.
The dependability of the supplier.
Whether Mini Motor has a track record of meeting its commitments.
Whether they can depend on Mini Motor to supply motors for a number of years or whether it is attempting to use some temporarily idle capacity.
All of these.
Relevant cost of making is equal to the avoidable cost
= (1.5+7-40,000/10,000)*50% +1
= $3.25 per unit
a.Advantage of outsourcing = (3.25-4.50)*10,000
= $(12,500) i.e. disadvantage
b.Advantage = -12,500+28,000 = $15,500
c. All of these.
Outsourcing (Make-or-Buy) Decision Mountain Air Limited manufactures a line of room air purifiers. Management is currently...
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 $8.00 Direct labor 1.50 Factory overhead 5.00 Total $14.50 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...
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 $ 9.00 Direct labor 1.40 Factory overhead 10.00 Total $ 20.40 These cost predictions include $80,000 in fixed factory overhead averaged over 10,000 units. The completed air purifier units include a battery-operated electric...
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 $ 8.00 Direct labor 1.50 Factory overhead 7.00 Total $ 16.50 These cost predictions include $50,000 in facility-level fixed factory overhead averaged over 10,000 units. The completed air purifier units include a battery-operated electric motor, which...
Can I get answers in 1 hour less. 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 $8.00 Direct labor 1.50 Factory overhead 5.00 Total $14.50 These cost predictions include $40,000 in facility-level fixed factory overhead averaged over 10,000 units. One of...
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