Question

The SP Corporation makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $5.50 Direct labor $5.60 Variable manufacturing overhead $4.45 Fixed manufacturing overhead $4.75An outside supplier recently began producing a comparable motor that could be used in the sewing machine which has been made available to Fedora at a price of $17 per motor. If Fedora was not making the motors on its own, there would be no other use for its production facilities and none of its fixed manufacturing overhead cost could be avoided. Direct labor is a fully variable cost. The annual financial advantage (disadvantage) for the company as a result of making the motors itself rather than buying them from the outside supplier would be:

Answer 1

Answer:

$58,000

Explanation:

The computation of the annual financial advantage (disadvantage) is shown below:

We have to take the difference between the making cost and the buying cost i.e given below

Making cost is

= (Direct materials per motor +  Direct labor per motor + Variable manufacturing overhead per motor) × number of motors produced

= ($5.5 + $5.6 + $4.45) × 40,000 motors

= $622,000

And,

Cost of buying is

= Number of motors produced × cost of buying

= 40,000 × $17

= $680,000

So,

Financial advantage of making is

= $680,000 - $622,000

=  $58,000