Mountain Air Limited manufactures a line of room air purifiers. Management is cu

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) Calculate the net benefit (cost) of outsourcing the electric motors from Mini Motor Company. (B) Calculate the net benefit (cost) of outsourcing the electric motors from Mini Motor Company, assuming the motor-assembly space could be rented to another company for $20,000 per year.

Explanation / Answer

Present situation Direct Material 8 Direct Labour 1.5 Factory overhead 7 Factory cost 16.5 Fixed overhead 5 Total cost 21.5 Meter cost 2 Product cost 23.5 a Outsourcing the electric motors from Mini Motor Company. Direct Material 8 Direct Labour 0.75 Factory overhead 3.5 Factory cost 12.25 Fixed overhead 5 Total cost 17.25 Meter cost 5 Product cost 22.25 Decision: If the company outsource the electric motors from mini motor company then it would make profit $1.25 (23.5-22.25) per unit b Outsourcing the electric motors from Mini Motor Company, assuming the motor-assembly space could be rented to another company for $20,000 per year. Direct Material 8 Direct Labour 0.75 Factory overhead 3.5 Factory cost 12.25 Fixed overhead 5 Total cost 17.25 Meter cost 5 Product cost 22.25 Rent Income -2 Net Product cost 20.25 Decision: If the company outsource the electric motors from mini motor company then it would make profit $3.25 (23.5-20.25) per unit

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