Acme Company, a manufacturer of snowmobiles, is operating at 80 percent of plant

Question

Acme Company, a manufacturer of snowmobiles, is operating at 80 percent of plant capacity. Acme's plant manager is considering manufacturing headlights, which are now being purchased for $15 each (a price that is not expected to change in the near future). The Acme plant has the equipment and labor force required to manufacture the headlights. The design engineer estimates that each headlight requires $6 of direct materials and $2.5 of direct labor. Acme's plant overhead rate is 175 percent of direct labor dollars, and 30 percent of the overhead is fixed cost.

Required:

If Acme Co. manufactures the headlights, how much of a gain (loss) for each headlight will result?

Explanation / Answer

Solution: Gain for each headlight = $3.44 Working Notes: Present purchase price of Headlights is $15, at this rate these headlights will also be sold in Market. Selling Price $15 Less: Material cost $6 Less: Direct labor cost $2.50 Less: Relevant Overhead 3.0625 Gain for each headlight $3.4375 $3.44 round off Relevant Overhead = 175% x Direct labor cost x (1-fixedcost%) =175% x $2.50 x (1- 0.30 ) =175% x $2.50 x 0.70 =$3.0625 Fixed cost is not relevant cost, as it is decision making calculation and fixed cost will not change whether headlights will be purchased or manufactured Please feel free to ask if anything about above solution in comment section of the question.

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