Chapter 11: Differential Analysis Example #4 Make or Buy For many years Lansing Company has purchased the starters that it installs in its standard line of garden tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against this move, however, pointing out that the cost to produce the starters would be greater than the current $10.00 per unit purchase price. The company's unit product cost, based on a production level of 60,000 starters per year, is as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common (allocated based on direct labor hours) Total production cost Make $4.00 2.75 .50 3.00 $180,000 135,000 2.25 $12.50 An outside supplier has offered to supply the starter to Lansing for only $10.00 per starter. One-third of the traceable fixed manufacturing costs represent supervisory salaries and other costs that can be eliminated of the starters are purchased. The other two-thirds of the traceable fixed manufacturing costs is depreciation of special manufacturing equipment that has no resale value. The decision would have no effect on the common fixed costs of the company and the space being used to produce the parts would otherwise be idle. Required: Should the company make or buy the starters