Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capa

Question

Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity.

Peluso's plant manager is considering making the headlights now being purchased from outside supplier for $11.00 each.

The Peluso plant has the equipment required to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor. Puluso's plant overhead rate is 200 percent of direct labor dollars, and 40 percent of the overhead is fixed cost. If Peluso Co. manufactures the headlights, how much of a gain (loss) for each headlight will result?

show work please

Explanation / Answer

cost of making Headlight : (4+3+3 x 200% x 60%) = $10.6

Gain on sale of each headlight = $11 - $10.6 = $0.40

As fixed cost Overhead occurs even if product is purchased.Hence,It is not Relevant for decision making

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