EXERCISE

Enterprise Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

The company has an offer from McDonald Valves to produce the part for $1,800 per unit and supply 1,000 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 needing their services.

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 $50,000 per year.

                                               Cost per Unit

Vanable casts

Direct materal                                      $800

Direct labor                                          500

Vanalale overhead                                 200

Total vanable cost                                1,5110

Fxed Cost

Depreclaton of equIpment                      400

Depreciation of ImIcImg                         100

SupervIsory salanes                              200

Total fixed cast                                    700

Total cost                                         $2,200

The company has an offer from McDonald Valves to produce the part for $1,800 per unit and supply 1,000 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 needing their services.

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 $50,000 per year.

Required:

Should the company make or buy the valve? Explain