Question

Mighty Safe Fire Alarm is currently buying 62,000 motherboards from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $28 per unit; direct labor, $11 per unit; and variable factory overhead, $14 per unit. Fixed costs for the plant would increase by $87,000. Which option should be selected and why?

a.make, $744,000 increase in profits

b.buy, $87,000 more in profits

c.buy, $657,200 more in profits

d.make, $657,200 increase in profits

Answer 1

	Relevant Cost of Manufacturing:
	Direct Material	28.00
	Direct Labor	11.00
	Variable OH	14.00
	Fixed OH	1.40	(87000/62000) Rounded off 2 to Decimal
	Total Cost -Relevant	54.40
	Purchase Cost	65.00
	Profit in Manufacturing over Purchase	10.60
	Units	62,000
	Profit in Total	657,200
	Answer is D