Magna International Inc., based in Aurora, Ontario, is a global engineer and manufacturer of highly advanced vehicles and automotive parts. Magna’s 2009 sales were US$23.7 billion. It frequently subcontracts work to other manufacturers, depending on whether its facilities are fully occupied, according to its “Flex Plant concept. Suppose Magna is about to make some final decisions regarding the use of its manufacturing facilities for the coming year.

Another manufacturer has offered to sell the same part to Magna for $20 each. The fixed overhead consists of depreciation, property taxes, insurance, and supervisory salaries. All the fixed overhead would continue if Magna bought the component except that the cost of $150,000 pertaining to some supervisory and custodial personnel could be avoided. 

1. Assume that the capacity now used to make parts will become idle if the parts are purchased. Should Magna buy or make the parts? Show computations. 

2. Assume that the capacity now used to make parts will either (a) be rented to a nearby manufacturer for $75,000 for the year or (b) be used to make oil filters that will yield a profit contribution of $100,000. Should Magna buy or make part EC113? Show your computations. 

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Excel Spreadsheet Template The following are the costs of making part EC113, a key component of an emissions control system: Total Cost for 50,000 Units Cost Per Unit $ 400,000 $ 8 Direct materials Direct labour 250,000 5 Variable factory overhead 150,000 Fixed factory overhead Total manufacturing costs $1,100,000 3 300,000 $22