XYZ Ltd needs 1,000 motors in its manufacture of cars. It can buy the cars from

Question

XYZ Ltd needs 1,000 motors in its manufacture of cars. It can buy the cars from Fast Motors for $1,250 each.  XYZ's plant can manufacture the motors for the following costs per unit:

            Direct materials                                                  $ 500

            Direct manufacturing labor                                    250

            Variable manufacturing overhead                          200

            Fixed manufacturing overhead                              350

            Total                                                                $1,300

If XYZ buys the motors from Fast Motors, 70% of the fixed manufacturing overhead applied will not be avoided.

Required:

a.         Should XYZ make or buy the motors? Show your calculations

b.         What additional (qualitative) factors should XYZ consider in deciding whether or not to make or buy the motors?

Explanation / Answer

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