Easyuse Tool Co. manufactures an electric motor that it uses in several of its p
ID: 2555075 • Letter: E
Question
Easyuse Tool Co. manufactures an electric motor that it uses in several of its products. Management is considering whether to continue manufacturing the motors or to buy them from an outside source. The following information is available.
1. The company needs 12,000 motors per year. The motors can be purchased from an outside supplier at a cost of $21 per unit.
2. The unit cost of manufacturing the motors is $35, computed as follows.
3. Discontinuing the manufacture of motors will eliminate all the raw materials and direct labor costs but will eliminate only 75 percent of the variable factory overhead costs.
4. If the motors are purchased from an outside source, machinery used in the production of motors will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $6,000 in fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discontinuing the production of motors.
a-1. Prepare a schedule to determine the incremental cost or benefit of buying the motors from the outside supplier.
a-2. Would you recommend that the company manufacture the motors or buy them from the outside source?
b-1. Assume that if the motors are purchased from the outside source, the factory space previously used to produce motors can be used to manufacture an additional 4,000 power trimmers per year. Power trimmers have an estimated contribution margin of $8 per unit. The manufacture of the additional power trimmers would have no effect on fixed factory overhead.
b-2. Would this new assumption change your recommendation as to whether to make or buy the motors?
Direct materials $ 96,000 Direct labor 120,000 Factory overhead: Variable 90,000 Fixed 114,000 Total manufacturing costs $ 420,000 Cost per unit ($420,000 ÷ 12,000 units) $ 35Explanation / Answer
Answer a-1 A schedule to determine the incremental cost or benefit of buying the motors from the outside supplier. Manufacture of motors Buying the Motors Incremental Benefit / (Cost) Purchase cost $0.00 $252,000.00 Direct Material $96,000.00 $0.00 Direct Labour $120,000.00 $0.00 Variable Factory Overhead $90,000.00 $22,500.00 Fixed Factory Overheads $114,000.00 $108,000.00 Total Cost $420,000.00 $382,500.00 $37,500.00 Answer a-2 I would recommend that the company should buy the motor from the outside source as there is a incremental benefit of $37500/- . Answer b-1 A schedule to determine the incremental cost or benefit of buying the motors from the outside supplier. Manufacture of motors Buying the Motors Incremental Benefit / (Cost) Purchase cost $0.00 $252,000.00 Direct Material $96,000.00 $0.00 Direct Labour $120,000.00 $0.00 Variable Factory Overhead $90,000.00 $22,500.00 Fixed Factory Overheads $114,000.00 $108,000.00 Contribution Margin from sale of power trimmers $0.00 -$32,000.00 Total Cost $420,000.00 $350,500.00 $69,500.00 Answer b-2 This new assumption won't change my previous recommendation to buy the motors as this option gives the incremental benefit of $69500/- .
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