Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of pla

Question

Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity. Peluso's plant manager is considering manufacturing headlights, which are now being purchased for $11 each (a price that is not expected to change in the near future). The Peluso plant has the equipment and labor force required to manufacture the headlights. The design engineer estimates that each headlight requires $4 of direct materials and $3 of direct labor. Peluso's plant overhead rate is 200 percent of direct labor dollars, and 40 percent of the overhead is fixed cost.

a. If Peluso Co. manufactures the headlights, how much of a gain (loss) for each headlight will result?

Explanation / Answer

Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant capacity. Peluso's plant manager is considering manufacturing headlights, which are now being purchased for $11 each (a price that is not expected to change in the near future). The Peluso plant has the equipment and labor force required to manufacture the headlights. The design engineer estimates that each headlight requires $4 of direct materials and $3 of direct labor. Peluso's plant overhead rate is 200 percent of direct labor dollars, and 40 percent of the overhead is fixed cost.

a. If Peluso Co. manufactures the headlights, how much of a gain (loss) for each headlight will result?
= $0.40

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