Question

The SP Corporation makes 42,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 10.10 Direct labor $ 9.10 Variable manufacturing overhead $ 3.75 Fixed manufacturing overhead $ 4.70 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 $25.75. 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

Calculating the total in-house production cost and comparing it to the purchase price from an outside supplier reveals that SP Corporation would have a financial disadvantage of $79,800 if it chose to produce the motors in-house.

Step-by-step explanation:

The student is asking for an analysis of whether SP Corporation should produce motors in-house or purchase them from an outside supplier. Given the cost breakdown provided, we need to determine the total cost of in-house production and compare it to the cost of purchasing the motors. The average cost per motor for in-house production is the sum of direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead, which are $10.10, $9.10, $3.75, and $4.70 respectively.

First, let's calculate the total in-house production cost:

• 
  
• Direct Materials: 42,000 motors × $10.10 = $424,200
• 
  
• Direct Labor: 42,000 motors × $9.10 = $382,200
• 
  
• Variable Manufacturing Overhead: 42,000 motors × $3.75 = $157,500
• 
  
• Fixed Manufacturing Overhead: 42,000 motors × $4.70 = $197,400

The total cost of in-house production is the sum of these amounts.

Total In-House Production Cost = $424,200 + $382,200 + $157,500 + $197,400 = $1,161,300

The cost to purchase the motors from an outside supplier is 42,000 motors × $25.75 per motor, which amounts to $1,081,500. Therefore, the difference between in-house production and purchasing is:

$1,161,300 (in-house) - $1,081,500 (purchase) = $79,800

SP Corporation has a financial disadvantage of $79,800 by choosing to produce the motors in-house rather than purchasing them.