Question

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 Mountain Air assembles with parts purchased from an outside vendor for $2.00 per motor. Mini Motor Company has offered to supply an assembled battery-operated motor at a cost of $5.00 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.

(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.

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

(b) If it could otherwise rent the motor-assembly space for $20,000 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 (if applicable).
  

(c) Management should consider which of the following nonquantitative factors in deciding whether to make or buy the motors.

i. The quality of their own and the supplier's motors.

ii. The dependability of the supplier.

iii. Whether Mini Motor has a track record of meeting its commitments.

iv. 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.

Answer 1

Answer is given below with working

a) Make Vs Buy Evaluation $1.50 Direct Material Direct Labor Variable factory Overhead Fixed factory Overhead Electric motor Total Cost Make Outsourcing Differential Per unit Total cost Per unit Total cost Total cost $8.00 $80,000 $8.00 $80,000 $15,000 $0.75 $7,500 $7,500 $2.000 $20,000 $1.00 $10,000 $10,000 $5.00 $50,000 $5.00 $50,000 $2.00 $20,000 $5.00 $50,000 $30,000 $18.50 $185,000 $19.75 $197,500 $12,500 Net disadvantage of outsourcing Mountain Air should continue to make the electric motor Net disadvantage of outsourcing is $12,500 b) Make Vs Buy Evaluation Make Outsourcing Differential Per unit Total cost Per unit Total cost Total cost Direct Material $8.00 $80,000 $8.00 $80,000 Direct Labor $1.50 $15,000 $0.75 $7,500 $7,500 Variable factory Overhead $20,000 $10,000 $10,000 Fixed factory Overhead $5.00 $50,000 $5.00 $50,000 Electric motor $2.00 $20,000 $5.00 $50,000 $30,000 Opportunity cost of Renting $2.000 $20,000 $0.00 $20,000 Total Cost | $20.50 $205,000 $19.75 $197,500 $7,500 Net advantage of outsourcing $2.00 $1.00 $0 Mountain Air should outsource the component Net advantage of outsourcing is $7,500 c) Answer is all of the above factors