Howse Houseboats Ltd produces houseboats for people to cruise on major rivers. The motors for the houseboats are currently purchased from an outside supplier at a cost of \($7700\) each. Some factory space that Howse Houseboats Ltd currently rents to another company for storage purposes could be used to produce the motors. The annual rental revenue from the factory space is now \($2\) 300 000.

If the company decides to manufacture the motors, it will have to purchase new machines at a cost of \($78\) 724 200. The new machinery will enable the company to produce its annual requirement of 75 000 motors and will have to be scrapped at the end of a 5-year useful life. The following costs per unit will be required to produce the motors (excluding the cost of the new machinery).

The direct fixed factory overhead will be required to start producing the motors, and the allocated fixed factory overhead will be a reassignment of existing costs based on estimated sales volume.
Required Should the company make or buy the motors for the houseboats? Explain why.

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Direct labour Direct materials Variable factory overhead $600 2 600 1 200 1 000 Fixed factory overhead-direct Fixed factory overhead-allocated 1600 Total $ 7000