Question

The Sipacore 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		$948
Direct labor		683
Variable overhead		277
Total variable costs		$1,908
Fixed costs
Depreciation of equipment		483
Depreciation of building		184
Supervisory salaries		285
Total fixed costs		952
Total cost		$2,860

The company has an offer from Duvall Valves to produce the part for $1,999 per unit and supply 1,030 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 $54,400 per year.

Should the company make or buy the valve?

Total incremental

savingscost

of buying valves is . The company should

buymake

the valves.

Answer 1

	Relevant Cost
Item	Make	Buy	Difference
Direct Material	976440
Direct Labor	703490
Variable Manufacturing Overhead	285310
Income from leasing vacant space		-54400
Cost of purchsing from outside supplier		2058970
Total Cost	1965240	2004570	(39,330)
Total incremental cost of buying valves is $39,330
The company should make valve