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 idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of manufacturing overhead.

Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision.

A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of:
1) $(2.00).
2) $1.60.
3) $0.40.
4) $2.80.

show work please

Explanation / Answer

$4.00 of direct materials, $3.00 of direct labor, $3.60 of manufacturing overhead. Total Variable cost $10.60 Gain $0.40 per unit (11 – 10.60) A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of: 3) $0.40.

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