Lamborgino Boats Ltd produces boats for water skiing. The motors for the boats are currently purchased from an outside supplier at a cost of $4000 each. Some factory space that Lamborgino Boats Ltd currently rents to another company for storage purposes could be used to produce the motors. The annual rental revenue from the factory space is now $1 500 000.
If the company decides to manufacture the motors, it will have to purchase new machines at a cost of $60 000 000. The new machinery will enable the company to produce its annual requirement of 60 000 motors and will have to be thrown out at the end of 5-year useful life. The following costs per unit will be required to produce the motors (excluding the cost of new machinery):
The direct fixed factory overhead will be required to start producing the motors, and the allocated fixed factory overhead will be a reassignment of existing costs based on estimated sales volume.
Should the company make or buy the motors for the boats? Explain why.