Barrus Corporation makes 40,000 motors to be used In the productions of its powe

Question

Barrus Corporation makes 40,000 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 $25.15 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. $254,000 higher $108,000 higher $76,000 lower $184,000 higher

Explanation / Answer

No of Motors 40000 Manufactured Purchased Increame3nt Per uNit Total Direct Material 9.9 396000 -396000 Direct labor 8.9 356000 -356000 Variable Overheads 3.65 146000 -146000 Fixed Overhead 4.6 184000 184000 0 0 Purchase price 25.15 1006000 1006000 Total 108000 The profit will be $ 108000 higher if manufactured The correct option is B. $ 108000 higher

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