Make or buy, unknown level of volume. (A.Atkinson, adapted) Denver Englneering manufactures small engines that it sells to manufacturers who install them in products such as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assemblies used in these engines.
The starter assemblies are currently manufactured in Division 3 of Denver Engineering. The costs relating to the starter assemblies for the past 12 months were as follows:
$$
\begin{array}{lr}
\text { Direct materials } & \$ 400,000 \\
\text { Direct manufacturing labor } & 300,000 \\
\text { Manufacturing overhead } & 800,000 \\
\hline \text { Total } & \underline{\$ 1,500,000} \\
\hline
\end{array}
$$
Over the past year, Division 3 manufactured 150,000 starter assemblies. The average cost for each starter assembly is $\$ 10(\$ 1,500,000 \div 150,000)$.
Further analysis of manufacturing overhead revealed the following information. Of the total manufacturing overhead, only $25 \%$ is considered variable. Of the fixed portion, $$\$ 300,000$$ is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued. A further $$\$ 200,000$$ of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, $$\$ 100,000$$, is the division manager's salary. If Denver Engineering discontinues production of the starter assemblies, the manager of Division 3 will be transferred to Division 2 at the same salary. This move will allow the company to save the $$\$ 80,000$$ salary that would otherwise be paid to attract an outsider to this position.