Question

The SP Corporation makes 38,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 9.70 Direct labor $ 8.70 Variable manufacturing overhead $ 3.55 Fixed manufacturing overhead $ 4.50 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 $24.55. 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:

Answer 1

Step-by-step explanation:

The fixed cost is relevant in this situation as it can not be avoided and there would be no other use for the facility.

Unit cost

Direct materials 9.70

Variable manufacturing cost 3.55

Fixed manufacturing overhead 4.50

Direct labor 8.70

Total 26.45

Units produced cost of producing 38,000 = 38000* 26.45 = 1,005,100

Cost of buying 38,000 = 38,000 * 24.55 = 932,900

Cost saved = 1,005,100 - 932,900 =72,200