Question

The Pembina 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		$942
Direct labor		650
Variable overhead		272
Total variable costs		$1,864
Fixed costs
Depreciation of equipment		504
Depreciation of building		214
Supervisory salaries		317
Total fixed costs		1,035
Total cost		$2,899

The company has an offer from Duvall Valves to produce the part for $2,091 per unit and supply 990 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 where, unfortunately, they really are not needed. 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 $56,060 per year.

Should the company make or buy the valve?

1.Total incremental

[OPTION: (cost OR savings)]

of buying valves is ________ 2. The company should

[OPTION: make OR buy]

the valves.

Answer 1