Chapter 10, Problem 6PB

Regal Executive, Inc., produces executive motor coaches and currently manufactures the cent awnings that accompany them at these costs:

The company received an offer from Saied Tents to produce the awnings for $3,200 per unit and supply 1,000 awnings for the coming year’s estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas.

Assume that for the short-term decision-making process demonstrated in this problem, the company’s total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased.

The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for $60,000 per year. Should the company make or buy the awnings?