Question

The SP Corporation makes 49,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 10.80 Direct labor $ 9.80 Variable manufacturing overhead $ 4.10 Fixed manufacturing overhead $ 5.05 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 $27.85. 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

Answer:

Savings in additional cost as result of making      $154,350.00

Explanation:

The relevant costs for this decision would be the variable cost of production and the external cost of purchase.

Unit variable cost of internal production  

= 10.80 + 9.80 + 4.10 = $24.7

Variable cost of making ( $24.7  × 49,000)       =  1,210,300.00  

Variable cost of Buying     ($27.85  × 49,000)  =   1,364,650.00  

Savings in additional cost as result of making       154,350.00

Note that the fixed cost is irrelevant for the purpose of the make or buy decision . This is so because they would be incurred either way. Hence, they are not to be considered for the analysis