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.

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.$)$

$($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$$of outsourcing $($if applicable$).($b$)$ If it could otherwise rent the motor$-$assembly space for $\backslash (\backslash$$ $25,000\backslash )$ 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$).$

$\backslash (\backslash$ddagger $\backslash )$