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9 November, 09:32

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:

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  1. 9 November, 11:37
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    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.
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