Question 24 (4 points) X Company makes 30,000 motors to be used in the productio

Question

Question 24 (4 points)

X Company makes 30,000 motors to be used in the production of its power lawn mowers. The manufacturing cost per motor at this level (30,000 units) of activity is as follows:

This motor has recently become available from an outside supplier for $25 per motor. If X 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 X 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?

Direct Materials $9.00 Direct labor $8.00 Variable Manufacturing Overhead $4.00 Fixed Manufacturing Overhead $6.00

Explanation / Answer

Net Operating Income will be higher by $120000 when th company make the motors.

Relevant cost to make:

Direct materials ($9.00 per unit × 30,000 units).................................$270,000

Direct labor ($8.00 per unit × 30,000 units).......................................$240,000

Variable manufacturing overhead ($4.00 per unit × 30,000 units).....$120,000

Total relevant cost to make................................................................$630,000

Total cost to buy ($25.00 per unit × 30,000 units)..............................$750,000

Cost saved by making the units = Cost to Buy - Cost to Make = $750000 - $ 630000 = $120000

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