Question

S Corporation makes 35,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 9.40 Direct labor $ 8.40 Variable manufacturing overhead $ 3.40 Fixed manufacturing overhead $ 4.35 An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to S Corporation for this motor is $23.65. If S 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 $204,750 $85,750 $152,250 ($66,500)

Answer 1

Advantage $85,750

Step-by-step explanation:

The calculation of Financial advantage for the company of making rather than buying is shown below:-

Financial advantage for the company of making rather than buying = Relevant cost of buying - Cost of making

Financial advantage = Price offered × Used production - (Direct material + Direct labor + Variable manufacturing overhead) × Used production

= $23.65 × 35,000 - ($9.40 + $8.40 + $3.40) × 35,000

= $827,750 - $21.20 × 35,000

= $827,750 - $742,000

Advantage = $85,750

Here, fixed costs are unavoidable, it is not a relevant cost