A company manufactures an electric motor that is uses inseveral of its porducts.
ID: 2433594 • Letter: A
Question
A company manufactures an electric motor that is uses inseveral of its porducts. Management is considering whether tocontinue manufacturing the motors or to buy them from an outsidesource. Information: 1. The company needs 10,00 motors per year. The motorscan be purchased from an outside supplier at a cost of $20 perunit. 2. The unit cost of maufacturing the motors is $42,computed as follows: direct materials...................$96,000 direct labor.........................120,000 Factory overhead: Variable.......................... 90,000 Fixed...............................114,000 Total manufacturing costs....$420,000 Cost per unit ($420,000/10,000units)..... $42 3. Discontinuing manufaction of the motors will eliminate allthe raw materials and direct labor cost, but will eliminate only75% of the varaiable factory overhead cost. 4. If the motors are purchased from an outside source,machinery used in prodcution of the motors will be sold at bookvalue, no gain or loss recognized. The sale of the machinery willalso eliminate $4,000 in fixed costs associated with depreciationand taxes. No other reduction in fixed factory costs willresult from stopping production. Question: Prepare a schedule to determine the incremental costor benefit of buying the motors from an outside supplier. Based on this schedule, would you recommend the company manufacturethe motors or buy them from an outside source? A company manufactures an electric motor that is uses inseveral of its porducts. Management is considering whether tocontinue manufacturing the motors or to buy them from an outsidesource. Information: 1. The company needs 10,00 motors per year. The motorscan be purchased from an outside supplier at a cost of $20 perunit. 2. The unit cost of maufacturing the motors is $42,computed as follows: direct materials...................$96,000 direct labor.........................120,000 Factory overhead: Variable.......................... 90,000 Fixed...............................114,000 Total manufacturing costs....$420,000 Cost per unit ($420,000/10,000units)..... $42 3. Discontinuing manufaction of the motors will eliminate allthe raw materials and direct labor cost, but will eliminate only75% of the varaiable factory overhead cost. 4. If the motors are purchased from an outside source,machinery used in prodcution of the motors will be sold at bookvalue, no gain or loss recognized. The sale of the machinery willalso eliminate $4,000 in fixed costs associated with depreciationand taxes. No other reduction in fixed factory costs willresult from stopping production. Question: Prepare a schedule to determine the incremental costor benefit of buying the motors from an outside supplier. Based on this schedule, would you recommend the company manufacturethe motors or buy them from an outside source?Explanation / Answer
Incremental analysis for make or buydecision:-
Make the motor
Buy the motor
Incremental analysis
Manufacturing cost for 10000 motors:
Direct material
Direct labor
Variable factory overhead
Fixed factory overhead
Purchase price of part, @ 20
$ 96,000
120,000
90,000
114,000
0
$ 0
0
22,500
110,000
200,000
$ 96,000
120,000
67,500
4,000
(200,000)
Total cost to acquire motor
$ 420,000
$ 332,500
$ 87,500
Our analysis shows that making the part will cost $420,000,while buying the part will cost $332,500.Thus the company will save$87,500 by buying the part.
Make the motor
Buy the motor
Incremental analysis
Manufacturing cost for 10000 motors:
Direct material
Direct labor
Variable factory overhead
Fixed factory overhead
Purchase price of part, @ 20
$ 96,000
120,000
90,000
114,000
0
$ 0
0
22,500
110,000
200,000
$ 96,000
120,000
67,500
4,000
(200,000)
Total cost to acquire motor
$ 420,000
$ 332,500
$ 87,500
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.