Question

Your Company makes 35,000 motors to be used in the production of its sewing machines. The...

Your Company makes 35,000 motors to be used in the production of its sewing machines. The cost per motor at this level of activity is:

Direct materials $4.50

Direct labor $4.60

Variable manufacturing overhead $3.75

Fixed manufacturing overhead $3.40

An outside supplier has offered to supply all the motors the company needs for $15 each. If Your Company decides to buy the motors, there would be no other use for the production facilities and 25% of the fixed manufacturing overhead cost could not be avoided. If Your Company decides to buy the motor, what is the change in net income net operating income?

A. $45,500

B. $ 14,000

C. ($45,500)

D. ($14,000)

Business   Accounting   
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Homework Answers

Answer #1

Cost of production of motor :

= Direct materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead

= 4.5 + 4.6 + 3.75 + 3.4 = $ 16.25 per motor

Cost of purchase of motor :

= Purchase cost + unavoidable fixed manufacturing overhead

= 15 + 25%(3.4) = $ 15.85 per motor

If company decided to purchase motor : net income would be,

= 16.25 - 15.85 = $ 0.40 per motor

Net income would be = 35,000 motors × $ 0.40 per motor

= $ 14,000

Hence, option "B" is correct.

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