13. Motor Company manufactures 10,000 units of Part M-l each year for use in its

Question

13. Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year: Direct materials $ 20,000 Direct labor 55,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 70,000 Total manufacturing cost $190,000 Valve Company has offered to sell Motor 10,000 units of Part M-l for $16.50 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?

A. No, because it would be $5,000 cheaper to make the part.

B. Yes, because it would be $10,000 cheaper to buy the part. (This is the answer)

C. No, because it would be $15,000 cheaper to make the part.

D. Yes, because it would be $25,000 cheaper to buy the part.

E. None of the above

Please write out the steps to this problem I dont get it.*******

Explanation / Answer

Make Buy Direct materials 20000 Direct labor 55000 Variable manufacturing overhead 45000 Avoidable Fixed manufacturing overhead 40000 Annual rental 15000 Purchase cost 165000 Total cost 175000 165000 Yes, because it would be $10,000(175000-165000) cheaper to buy the part

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