Question

S Corporation makes 50,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 10.90 Direct labor $ 9.90 Variable manufacturing overhead $ 4.15 Fixed manufacturing overhead $ 5.10 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 $28.15. 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 $160,000 $367,500 ($95,000) $255,000

Answer 1

If the company makes the motors, it will save $160,000.

Step-by-step explanation:

Giving the following information:

Production= 50,000 units

Production costs:

Direct materials $10.90

Direct labor $9.90

Variable manufacturing overhead $4.15

The price offered to S Corporation for this motor is $28.15.

We will take into account only the avoidable costs:

Make in-house:

Total cost= 50,000*(10.9 + 9.9 + 4.15)= $1,247,500

Buy:

Total cost= 50,000*28.15= $1,407,500

If the company makes the motors, it will save $160,000.