Outsourcing (Make-or-Buy) Decision
Mountain Air Limited manufactures a line of room air purifiers.Management is currently evaluating the possible production of anair purifier for automobiles. Based on an annual volume of 10,000units, the predicted cost per unit of an auto air purifierfollows.
| Direct materials | $8.00 |
| Direct labor | 1.50 |
| Factory overhead | 9.00 |
| Total | $18.50 |
These cost predictions include $60,000 in facility-level fixedfactory overhead averaged over 10,000 units.
One of the component parts of the auto air purifier is abattery-operated electric motor. Although the company does notcurrently manufacture these motors, the preceding cost predictionsare based on the assumption that it will assemble such a motor.Mini Motor Company has offered to supply an assembledbattery-operated motor at a cost of $5.50 per unit, with a minimumannual order of 5,000 units. If Mountain Air accepts this offer, itwill be able to reduce the variable labor and variable overheadcosts of the auto air purifier by 50 percent. The electric motor'scomponents will cost $2.00 if Mountain Air assembles themotors.
(a) Determine whether Mountain Air should continue to make theelectric motor or outsource it from Mini Motor Company.
(b) If it could otherwise rent the motor-assembly space for$24,000 per year, should it make or outsource this component?
(c) Management should consider which of the followingnonquantitative factors in deciding whether to make or buy themotors.
The quality of their own and the supplier's motors.
The dependability of the supplier.
Whether Mini Motor has a track record of meeting itscommitments.
Whether they can depend on Mini Motor to supply motors for anumber of years or whether it is attempting to use some temporarilyidle capacity.
All of these.
