Question

Barrus Corporation makes 43,000 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 $10.20 Direct labor $9.20 Variable manufacturing overhead $3.80 Fixed manufacturing overhead $4.75 This motor has recently become available from an outside supplier for $26.05 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.A) $70,300 lowerB) $223,850 higherC) $94,350 higherD) $164,650 higher

Answer 1

Answer:

$122,550 higher

Explanation:

The total cost per motor is:

• direct materials         $10.20
• direct labor                $9.20
• variable overhead     $3.80
• fixed overhead          $4.75
• total cost per unit :  $27.95

Total cost for producing 43,000 units: 43,000 units x $27.95 per unit = $1,201,850

Total cost if the company decides to buy the motors instead of manufacturing them = ($26.05 x 43,000) + ($4.75 x 43,000) = $1,324,400

If the company decides to keep manufacturing the motors their net operating income will be $122,550 higher.