2. Outsourcing (Make-or-Buy) Decision Mountain Air Limited manufactures a line o

Question

2. 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. ....10.00 . ..$20.40 Total... These cost predictions include $80,000 in 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 $5.50 per unit, with a minimum an- nual order of 5,000 units. If Mountain Air accepts this offer, it will be able to reduce the variable labotr and variable overhead costs of the auto air purifier by 50 percent. Required 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.)

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer and please give thumbs up   Statementshowing Computations Paticulars Make buy Difference Direct Materials                    2.00                      2.00 Direct Labour = 1.40*.50                    0.70                      0.70 Variable factory overhead (10 - 80,000/10,000)*50%                    1.00                      1.00 Purchase cost                      5.50                   (5.50) Total Relevant cost                    3.70                      5.50                   (1.80) Mountain air should continue to make b) Direct Materials                    2.00                      2.00 Direct Labour = 1.40*.50                    0.70                      0.70 Variable factory overhead (10 - 80,000/10,000)*50%                    1.00                      1.00 Purchase cost                      5.50                   (5.50) Rent = 25000/10000                   (2.50)                      2.50 Total Relevant cost                    3.70                      3.00                      0.70 Mountain air should purchase as it wil save .70 per unit c) It should consider quality of motor supplied…. Impact on sales….Whether it is getting quantity discount etc

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