Question

The SP Corporation makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 5.50 Direct labor $ 5.60 Variable manufacturing overhead $ 4.75 Fixed manufacturing overhead $ 4.45 An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Corporation for this motor is $18. If SP Corporation decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost in this company. The annual financial advantage (disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be: Multiple Choice $276,000 $86,000 ($92,000) $178,000

Answer 1

$86,000

Step-by-step explanation:

Please see attachment .

Answer 2

The correct answer is B: $86,000

Step-by-step explanation:

Giving the following information:

The SP Corporation makes 40,000 motors:

Direct materials $ 5.50

Direct labor $ 5.60

Variable manufacturing overhead $ 4.75

Fixed manufacturing overhead $ 4.45

The price offered to SP Corporation for this motor is $18.

The fixed manufacturing cost are a sunk cost.

Producing in house= 5.50*40000 + 5.60*40000 + 4.75*40000= 634,000

Buying= 18*40000= $720,000

Financial advantage= 720000 - 634000= 86000