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Outsourcing (Make-or-Buy) Decision Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating...

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Finance

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$ 9.00
Direct labor1.40
Factory overhead10.00
Total$ 20.40

These cost predictions include $80,000 in fixed factory overheadaveraged over 10,000 units.

The completed air purifier units include a battery-operatedelectric motor, which Mountain Air assembles with parts purchasedfrom an outside vendor for $2.00 per motor. Mini Motor Company hasoffered to supply an assembled battery-operated motor at a cost of$5.50 per unit, with a minimum annual order of 5,000 units. IfMountain Air accepts this offer, it will be able to reduce thevariable labor and variable overhead costs of the auto air purifierby 50 percent.


(a) Determine whether Mountain Air should continue to make theelectric motor or outsource it from Mini Motor Company.

  • Calculate the net advantage (disadvantage) of outsourcing theelectric motors from Mini Motor Company.

  • Use a negative sign with your answer to indicate a netdisadvantage (if applicable.)
    $Answer

(b) If it could otherwise rent the motor-assembly space for$25,000 per year, should it make or outsource this component?

  • Calculate the net advantage (disadvantage) of outsourcing themotors, assuming the space could be rented.
  • Use a negative sign with your answer to indicate a netdisadvantage (if applicable).
    $Answer

(c) What additional factors should it consider in decidingwhether to make or outsource the electric 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 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.

Please answer all questions. Thank you.

Answer & Explanation Solved by verified expert
4.0 Ratings (470 Votes)
50 reduction in the variable labor and variable overhead costs of the auto air purifier New variable labor cost 140 x 1 50 070 Total overhead 10 x 10000 100000 Fixed overhead variable overhead 80000 Variable overhead per unit x 10000 Hence old variable overhead per unit 100000 80000 10000 2 New variable overhead per unit 2 x 1 50 1 Part    See Answer
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Outsourcing (Make-or-Buy) DecisionMountain 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$ 9.00Direct labor1.40Factory overhead10.00Total$ 20.40These cost predictions include $80,000 in fixed factory overheadaveraged over 10,000 units.The completed air purifier units include a battery-operatedelectric motor, which Mountain Air assembles with parts purchasedfrom an outside vendor for $2.00 per motor. Mini Motor Company hasoffered to supply an assembled battery-operated motor at a cost of$5.50 per unit, with a minimum annual order of 5,000 units. IfMountain Air accepts this offer, it will be able to reduce thevariable labor and variable overhead costs of the auto air purifierby 50 percent.(a) Determine whether Mountain Air should continue to make theelectric motor or outsource it from Mini Motor Company.Calculate the net advantage (disadvantage) of outsourcing theelectric motors from Mini Motor Company.Use a negative sign with your answer to indicate a netdisadvantage (if applicable.)$Answer(b) If it could otherwise rent the motor-assembly space for$25,000 per year, should it make or outsource this component?Calculate the net advantage (disadvantage) of outsourcing themotors, assuming the space could be rented.Use a negative sign with your answer to indicate a netdisadvantage (if applicable).$Answer(c) What additional factors should it consider in decidingwhether to make or outsource the electric 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 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.Please answer all questions. Thank you.

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