Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:
|
|
Cost per Unit |
| Variable costs |
|
|
| Direct material |
|
$950 |
| Direct labor |
|
660 |
| Variable overhead |
|
320 |
| Total variable costs |
|
$1,930 |
| Fixed costs |
|
|
| Depreciation of equipment |
|
490 |
| Depreciation of building |
|
210 |
| Supervisory salaries |
|
310 |
| Total fixed costs |
|
1,010 |
| Total cost |
|
$2,940 |
The company has an offer from Duvall Valves to produce the part for $2,070 per unit and supply 1,020 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. 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 $55,100 per year.
- Should the company make or buy the valve?
- Incremental
costsavings of buying valves is . The company should makebuy the valves.