Super Motors produces electric motors for sump pumps. The company’s normal produ
ID: 2451410 • Letter: S
Question
Super Motors produces electric motors for sump pumps. The company’s normal production volume is 2,500 motors per month. The maximum production capacity is 5,000 motors per month. The current selling price per motor is $650. The cost per unit of manufacturing and marketing the motors at the normal volume is as follows:
An outside contractor is willing to supply 1,250 motors at a price of $312 per unit. If the offer is accepted, the company will make 1,250 motors in-house and buy 1,250 motors from the contractor. The company’s fixed manufacturing costs will decline by 30% and the variable marketing costs per unit on the 1,250 motors purchased will decline by 25%. Compute the cost in each option. (Do not round intermediate calculations.)
Super Motors produces electric motors for sump pumps. The company’s normal production volume is 2,500 motors per month. The maximum production capacity is 5,000 motors per month. The current selling price per motor is $650. The cost per unit of manufacturing and marketing the motors at the normal volume is as follows:
Explanation / Answer
Normal production = 2500 units
Per unit fixed production overheads = $104
Total fixed production overheads = $104 * 2500 = $260,000
After 30% decline in fixed production overheads, total fixed overheads will be = $260,000 - 30% of $260,000=
$182,000
Therefore, per unit fixed production overheads for 1,250 units of production = $182,000/1250 = $145.60
Variable marketing cost per unit after 25% decline = $32 - 25% of $32 = $24
New Cost of production for 1,250 units of pumps
Direct Materials = $82
Direct Labour = $104
Variable overheads = $21
Fixed overheads = $145.60
Marketing cost (Variable) = $24
Marketing cost (Fixed) = $72
Per unit cost of production for 1250 units= $448.60
Since, the per unit cost of production has increased from $412 to $448.60, hence it is recommended that the company should produce all the 2500 units of pump.
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