XYZ Company makes 25,000 motors to be used in the production of its power lawn m
ID: 2358775 • Letter: X
Question
XYZ Company makes 25,000 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 $50,000 per year. Calculate the decrease in company profits if XYZ Company accepts the outside suppliers offer.Explanation / Answer
Total variable cost = (9.5 + 8.6 + 3.75) x 25000 = $546250 Total allocated fixed cost = 25000 x 4.35 = $108750 Allocated fixed cost should not be considered in decision making. Thus, total relevant cost for manufacture 25000 motors = $546250 By Buying from outside supplier, total cost = 25000 x 25 = $625000 Rental income = $50000 Net cost of buying from outside supplier = 625000 - 50000 = $575000 Decrease in company profits = 575000 - 546250 = $28750 Hope this helps!
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