9091 Company, a manufacturer of motorcyles, is operating at80% of plant capacity

Question

9091 Company,  a manufacturer of motorcyles, is operating at80% of plant capacity. 9091's plant manager is considering making the gearshift levers now being purchased from an outside supplier for $11 each. The 9091 plant has idle equipment that could be used to manufacture the levers. The design engineer estimates that each lever requires $4 of direct materials, $4 of direct labor, and $6.00 of manufacturing overhead. Sixty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by 9091 Company to manufacture the levers should result in a net gain (loss) for each lever of:

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Total Per Unit Cost to Manufacture the Levers = 4 (Direct Material) + 4 (Direct Labor) + 40%*6 (Variable Manufacturing Overhead) = $10.40

Net Gain = Sales Price - Total Per Unit Cost = 11 - 10.40 = $.60

Option A (.60) is the correct answer.

Thanks.

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