Question

Barrus Corporation makes 36,000 motors to be used in the productions of its power lawn mowers. The average cost per motor at this level of activity is as follows: Direct materials $9.50 Direct labor $8.50 Variable manufacturing overhead $3.45 Fixed manufacturing overhead $4.40 This motor has recently become available from an outside supplier for $23.95 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company.

Answer 1

It is cheaper to make the product.

Step-by-step explanation:

Giving the following information:

Barrus Corporation makes 36,000 motors to be used in the productions of its power lawnmowers. The average cost per motor at this level of activity is as follows: Direct materials $9.50 Direct labor $8.50 Variable manufacturing overhead $3.45

This motor has recently become available from an outside supplier for $23.95 per motor.

The fixed costs remain the same in both options, therefore, we will not take it into account for the decision making process.

We need to determine which option is the cheapest.

Produce in-house:

Total cost= 36,000*(9.5 + 8.5 + 3.45)= $772,200

Buy:

Total cost= 36,000*23.95= $862,200

It is cheaper to make the product.