Eaton Corporation, based in Cleveland,is a global manufacturer of highly engineered products that serveindustrial vehicle, construction, commercial, aerospace, andsemiconductor markets. It frequently subcontracts work to othermanufacturers, depending on whether Eaton’s facilities are fullyoccupied. Suppose Eaton is about to make some final decisionsregarding the use of its manufacturing facilities for the comingyear.
The following are the costs of makingpart ML7X, a key component of an emissions control system:
Total Cost for
50,000Units Cost perUnit Directmaterial $ 400,000 $ 8
Directlabor 300,000 6
Variable factory overhead 150,000 3
Fixed factoryoverhead 300,000 6
Total manufacturing costs $1,150,000 $23
Another manufacturer has offered tosell the same part to Eaton for $20 each. The fixed overheadconsists of depreciation, property taxes, insurance, andsupervisory salaries. All the fixed overhead would continue ifEaton bought the component except that the cost of $100,000pertaining to some supervisory and custodial personnel could beavoided.
Required
Assume that the capacity now used to make parts will become idleif the parts are purchased. Should Eaton buy or make the parts?Show computations.
Assume that capacity now used to make parts will either (a) berented to a nearby manufacturer for $65,000 for the year or (b) beused to make oil filters that will yield a profit contribution of$200,000. Should Eaton buy or make part ML7X? Showcomputations.
