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. Solution cost of product when the motor is being assembled by mountain air: cost of the air purifier when the company outsource the electric motor from mini motor company: Direct material is 6 because company will not pay $2 for motor component. 50 % reduction in labor Fixed factory overhead is $6 as total fixed overhead are 60,000 so out of 80,000 variable overheads are only 20,000 so $2 per unit, so there is 50% reduction so the total factory overhead would be 7 per unit. $5 per unit would be the cost of the motor which will be outsources. So there will be a loss of $1.25 on every unit if the company outsources. The second scenario is when the company rents the space for $ 28,000. So taking into consideration 10,000 units produces, There will be a addition cost saving of $2.8 per unit. The total cost now would be as follows: 15.95 There would be cost saving of $ 1.55 on every unit. .

1. 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 $8.00
Direct labor 1.50
Factory overhead 8.00
Total $17.50
Solution
cost of product when the motor is being assembled by mountain air:
cost of the air purifier when the company outsource the electric motor from mini motor
company:
Direct material is 6 because company will not pay $2 for motor component.
50 % reduction in labor
Fixed factory overhead is $6 as total fixed overhead are 60,000 so out of 80,000 variable
overheads are only 20,000 so $2 per unit, so there is 50% reduction so the total factory overhead
would be 7 per unit.
$5 per unit would be the cost of the motor which will be outsources.
So there will be a loss of $1.25 on every unit if the company outsources.
The second scenario is when the company rents the space for $ 28,000.
So taking into consideration 10,000 units produces, There will be a addition cost saving of $2.8
per unit.
The total cost now would be as follows:

2. 15.95
There would be cost saving of $ 1.55 on every unit.
Direct materials 8
direct labor 1.5
Factory overhead 8
17.5