Barrus Corporation makes 46,000 motors to be used in the productions of its powe

Question

Barrus Corporation makes 46,000 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 $26.95 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.

$87,400 lower

$319,700 higher

$138,000 higher

$225,400 higher

Barrus Corporation makes 46,000 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:

Explanation / Answer

If motors are made Direct materials $10.50   Direct labor $9.50   Variable manufacturing overhead $3.95   Fixed manufacturing overhead $4.90 Total 28.85 Total Cost= 46000*28.85 1327100 If purchased Price 26.95 Fixed Cost 4.9 Total 31.85 Total 46000*31.85 1465100 Effect on net income 1465100-1327100 = $ 138000 Income will be $ 138000 Higher

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