Butterworth Boats Ltd produces boats for water skiing. The motors for the boats are currently purchased from an outside supplier at a cost of $4000 each. Some factory space that Butterworth Boats 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 $1500000.

If the company decides to manufacture the motors, it will have to purchase new machines at a cost of $60000000. The new machinery will enable the company to produce its annual requirement of 60000 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):

Direct labour Direct materials Variable factory overhead Fixed factory overhead — direct Fixed factory overhead — allocated		$  500 1600 800 500    800
Total		$4200

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 boats? Explain why.