Question

S Corporation makes 41,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 10.00 Direct labor $ 9.00 Variable manufacturing overhead $ 3.70 Fixed manufacturing overhead $ 4.65 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 $25.45. 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:

Answer 1

Answer:

$112,750

Explanation:

Particulars                                Cost of making               Cost of buying

Direct material                       41,000*10=410,000                  0

Direct labor                            41,000*9=369,000                   0

Variable manuf. overhead    41,000*3.70=151,700                0

Fixed manuf. overhead         41,000*4.65=190,650    41,000*4.65=190,650

Outside supplier's price                      0                        41,000*25.45=1,043,450

Total cost                                      $1,121,350                      $1,234,100

Financial advantage of making the motors = $1,234,100 - $1,121,350

Financial advantage of making the motors = $112,750