Question

Peluso company a manufacturer of snowmobeils is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased from an outside supplier for $11 each. the peluso plant has idle equipment that could be used to manufacture headlights. the design engineer estimates that each headlight requires $4 of the DM, $3 of DL and $6 of MOH. 40% of the manufacturing OH is a fixed cost that would be unaffected by the decision. A decision by Peluso comp to manufacture the headlights should result in a net gain(loss) for each headlight of:

A)$(2.00)
B) $1.60
C)$0.40
D)$2.80

Answer 1

The net gain or loss for each headlight should be calculated to determine if Peluso Company should manufacture the headlights in-house or continue purchasing from an outside supplier.

Step-by-step explanation:

In order to determine if Peluso Company should manufacture the headlights in-house, we need to calculate the net gain or loss for each headlight. The costs associated with manufacturing a headlight include direct materials (DM), direct labor (DL), and manufacturing overhead (MOH).DM cost per headlight = $4, DL cost per headlight = $3, MOH cost per headlight = $6Since the manufacturing overhead is partially fixed and partially variable, we need to separate the fixed cost from the variable cost. Given that 40% of the MOH is fixed, the fixed MOH cost per headlight would be: 40% * $6 = $2.4.

The variable MOH cost per headlight would be: $6 - $2.4 = $3.6Adding up the costs, the total cost per headlight would be: DM + DL + MOH = $4 + $3 + $3.6 = $10.6The current cost of purchasing the headlights from an outside supplier is $11 each. Therefore, if Peluso Company decides to manufacture the headlights in-house, the net loss per headlight would be: $10.6 - $11 = -$0.4Therefore, the correct answer is Option A) $(2.00). Manufacturing the headlights internally would result in a net loss of $0.40 per headlight.