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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

$($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.

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