Question

Outsourcing decision:-Walker, Inc. currently manufactures 4,000 motors for its electric scooters annually. Direct material costs are $44,000 and direct labor total $16,000 annually. Overhead totals $18 per unit of which $5 is variable. Eighty percent of the fixed overhead is unavoidable. Swingly, Inc. has contacted Walker with an offer to sell the motors for $24 each. Should Walker continue making motors or buy from Swingly?

Answer 1

Walker shall continue to make such motors as there will be savings of $5,600

Step-by-step explanation:

Variable cost per unit

Direct material = $44,000/4,000 = $11

Direct labor cost = $16,000/4,000 = $4

Variable overhead = $5

Total variable overhead = $20

Total Fixed cost = ($18 - $5)
`*` 4,000 units = $52,000

Total cost of manufacturing = $52,000 + $20
`*` 4,000

= $52,000 + $80,000 = $132,000

In case of buying

Fixed cost = $52,000
`*` 80% = $41,600

Variable cost = $24
`*` 4,000 = $96,000

Total cost in case of buying = $137,600

Since the cost of buying motors is expensive than manufacturing, Motors shall be manufactured by Walker Inc.

In that case it saves = $137,600 - $132,000 = $5,600