Barrus Corporation makes 32,000 motors to be used in the productions of its powe

Question

Barrus Corporation makes 32,000 motors to be used in the productions of its power lawn mowers. The average cost per motor at this level of activity is as follows: This motor has recently become available from an outside supplier for $22.75 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier? Assume that direct labor is a variable cost in this company.

Explanation / Answer

Variable cost of the company = $ 9.1+ $8.1+$ 3.25 = $ 20.45

purchase cost = $ 22.75

Extra cost in purchasing = $ 22.75- $ 20.45 = $ 2.30

Extra Profit = 32000 X 2.3 = $ 73600 higher

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