EXERCISE
Enterprise Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
The company has an offer from McDonald Valves to produce the part for $1,800 per unit and supply 1,000 valves (the number needed in the coming year).
If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas needing their services.
The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $50,000 per year.
Cost per Unit
Vanable casts
Direct materal $800
Direct labor 500
Vanalale overhead 200
Total vanable cost 1,5110
Fxed Cost
Depreclaton of equIpment 400
Depreciation of ImIcImg 100
SupervIsory salanes 200
Total fixed cast 700
Total cost $2,200
The company has an offer from McDonald Valves to produce the part for $1,800 per unit and supply 1,000 valves (the number needed in the coming year).
If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas needing their services.
The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $50,000 per year.
Required:
Should the company make or buy the valve? Explain