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 an outside supplier for $29 each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $8.50 of direct materials, $12 of direct labor, and $12.75 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 (Do not round your intermediate calculations):

a. $9.05

b. $(4.25)

c. $0.85

d. $3.40

Explanation / Answer

CALCULATION OF NET GAIN (LOSS) TO PELUSO COMPANY ON MAKING THE HEADLIGHTS:

PURCHASE COST OF HEADLIGHTS=$29

MANUFACTURING COST OF HEADLIGHTS:

TOTAL MANUFACTURING COST=$8.5+$12+$7.65=$28.15

GAIN ON MANUFACTURING=$29-$28.15=$0.85

HENCE (c)$0.85 IS CORRECT

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