The make or buy decision
Response to the following problem:
Eldon Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Eldon. The supplier will charge Eldon $620 per engine for the set of parts. Eldon's current costs for those part sets are direct materials, $360; direct labor, $180; and manufacturing overhead applied at 100% of direct labor. Variable manufacturing overhead is considered to be 30% of the total, and fixed overhead will not change if the part sets are acquired from the outside supplier.
Required: Should Eldon Engine, Inc., continue to make the part sets or accept the offer to purchase them for $620?