Question :

Mountain Air Limited manufactures a line of room air purifiers. Management is presently computing the possible production of an air purifier for automobiles. Based on an yearly volume of 10,000 units, the evaluated cost per unit of an auto air purifier follows.

Direct materials                $ 8.00

Direct labor         1.50

Factory overhead            7.00

Total      $ 16.50

These cost predictions add $50,000 in facility-level fixed factory overhead averaged over 10,000 units.

The completed air purifier units add a battery-operated electric motor, which Mountain Air assembles with parts purchased from an outside vendor for $2.00 per motor. Mini Motor Company has provided to supply an assembled battery-operated motor at a cost of $5.00 per unit, with a minimum annual order of 5,000 units. If Mountain Air accepts this offer, it can be able to reduce the variable labor and variable overhead costs of the auto air purifier by 50 percent.

(a) Determine the net benefit of outsourcing the electric motors from Mini Motor Company.

(b) Determine the net benefit (cost) of outsourcing the electric motors from Mini Motor Company; consider the motor-assembly space could be rented to another company for $20,000 per year.