XYZ Company makes 20,000 motors to be used in the production of its power lawn m

Question

 XYZ Company makes 20,000 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 $154,000 per year.  Calculate the selling price per unit charged by the outside supplier that would make XYZ economically indifferent between making and buying the motor. Enter your answer with two places after the decimal point (i.e., $47.60). 

Explanation / Answer

Statement showing computations Particulars Make Buy Direct Materials cost = 20,000*9.50             190,000.00 Direct Labour Costs = 20,000*8.60             172,000.00 Variable Overhead Costs =20,000*3.75                75,000.00 Purchase Costs = 20,000*x 20,000x Rent from facilities               (154,000.00) Total Relevant Costs             437,000.00 20,000x - 154,000 437,000 = 20,000x - 154,000 591,000 = 20,000x x = $29.55 Even if seller charged $29.55 then it would be indifferent.

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