Southwestern Company needs 1000 motors in its manufacture of automobiles. It can buy the motors from Jinx Motors for $1250 each.
Southwestern’s plant can manufacture the motors for the following costs per unit:
Direct materials-$500
Direct manufacturing labor- $250
Variable manufacturing overhead- $200
Fixed manufacturing overhead- $350
Total- $1300
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be avoided.
Required:
a) Should the company make or buy the motors? Show calculations.
b) What additional factors should Southwestern consider in deciding whether or not to make or buy the motors?
