Starwood Aviation produces an executive jet for which it currently manufactures

Question

Starwood Aviation produces an executive jet for which it currently manufactures an airflow lever. The cost of each lever is indicated below:

Variable costs

      Direct material                                    $300

      Direct labor                                           200

      Variable overhead                                150

            Total variable costs                                               $650

Fixed costs

      Depreciation of equipment                     120

      Depreciation of building                          80

      Supervisory salaries                             140

            Total fixed costs                                                   340

Total cost                                                                          $990

The company has an offer from Lans Levers to produce the part for $700 per unit and is able to supply the 600 levers needed in the coming year. If the company accepts this offer and shuts down production of levers, supervisors will be reassigned to other areas needing their services. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the lever can be used by another production group that is currently leasing space for $21,000 per year. Should the company should make or buy the lever? Why?

Explanation / Answer

Prepare differential analysis :

Company should buy the lever. because purchase cost is less than manufacturing cost

Make Buy Direct material 180000 Direct labour 120000 Variable overhead 90000 Supervisor's salary 84000 Opportunity cost 21000 Purchase cost 420000 Total cost 495000 420000

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