Question

The SP Corporation makes 42,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 10.10 Direct labor $ 9.10 Variable manufacturing overhead $ 3.75 Fixed manufacturing overhead $ 4.70 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 $25.75. 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:

annual financial advantage, $837,600

Explanation:

Analysis of the Make or Buy Decision - Making

Making Costs

Direct materials $ 10.10×42,000                                424,200

Direct labor $ 9.10×42,000                                        382,200

Variable manufacturing overhead $ 3.75×42,000    157,500

Fixed manufacturing overhead $ 4.70×42,000         197,400

Total                                                                             1,161,300

Buying Costs

Purchase Price $25.75×42,000                                1,801,500

Fixed manufacturing overhead $ 4.70×42,000         197,400

Total                                                                            1,998,900

It costs $837,600 more to Buy than to make.

Hence the annual financial advantage for the company as a result of making the motors rather than buying them from the outside supplier would be $837,600.