XYZ Company makes 20,000 motors to be used in the production of its power lawn m

Question

XYZ Company makes 20,000 motors to be used in the production of its power lawn mowers. The cost per motor at this level of activity is as follows: direct materials .............. $ 9.50 direct labor .................. 8.60 variable overhead ............. 3.75 allocated fixed overhead ...... 4.35 total ...................... $26.20 The motor has recently become available from an outside supplier for $25 per motor. If XYZ purchases the motor from the outside supplier, the space that is currently being used to manufacture the motor can be rented out for $154,000 per year. Calculate the selling price per unit charged by the outside supplier that would make XYZ economically indifferent between making and buying the motor.

Explanation / Answer

cost for motor if it manufactur itself = 26.2 * 20000 = 524000

if the comany uses outside supplier then selling price per unit where XYZ economically indifferent would be

   20000/x -154000 = 524000

        20000/x = 678000

         x = 33.9

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