Howell Corporation_Make or buy

$12.00

Description

Howell 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 $900
Direct
labor $600
Variable
overhead $300
Total
variable costs $1,800

Fixed
costs
Depreciation
of equipment $500
Depreciation
of building $200
Supervisory
salaries $300
Total
fixed costs $1,000

Total
cost $2,800

The
company has an offer from Duvall Valves to produce the part for $2,000 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. 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 $55,000 per year.

What
is the incremental savings of buying the valves?

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