Outsourcing $($Make$-$or$-$Buy$)$ Decision

Mountain Air Limited manufactures a line of room air purifiers. Management is currently evaluating the possible production of an air purifier for automobiles. Based on an annual volume of $10,000$ units, the predicted cost per unit of an auto air purifier follows.

Direct materials$ $9\mathrm{.}00$Direct labor$1\mathrm{.}40$Factory overhead$10\mathrm{.}00$Total$ $20\mathrm{.}40$

$$

These cost predictions include $$80,000$ in$$fixed factory overhead averaged over $10,000$ units.

The completed air purifier units include a battery$-$operated electric motor, which$$Mountain Air assembles with parts purchased from an outside vendor for $$2\mathrm{.}00$ per motor.$$Mini Motor Company has offered to supply an assembled battery$-$operated motor at a cost of $$5\mathrm{.}50$ per unit, with a minimum annual order of $5,000$ units. If Mountain Air accepts this offer, it will be able to reduce the variable labor and variable overhead costs of the auto air purifier by $50$ percent.$$

$($a$)$ Determine whether Mountain Air should continue to make the electric motor or outsource it from Mini Motor Company. $($Hint: Analyze the relevant costs of making the $$motors$,$ not the entire air purifier.$)$

Calculate the net advantage $($disadvantage$)$of$$outsourcing the electric motors from Mini Motor Company.

Use a negative sign with your answer to indicate a net disadvantage$$of outsourcing $($if applicable.$)$

$Answer $1$

$($b$)$ If it could otherwise rent the motor$-$assembly space for $$25,000$ per year, should it make or outsource this component?

Calculate the net advantage $($disadvantage$)$ of$$outsourcing the$$motors$,$ assuming the space could be$$rented$.$

Use a negative sign with your answer to indicate a net disadvantage$$of outsourcing $($if applicable$).$

$Answer $2$

$($c$)$What additional factors should it consider in deciding whether to make or outsource the electric motors?

The quality of their own and the supplier's motors.

The dependability of the supplier.

Whether Mini Motor has a track record of meeting its commitments.

Whether they can depend on Mini Motor to supply motors for a number of years or whether it is attempting to use some temporarily idle capacity.

All of these.