Question

Check my work Easyuse Tool Co. manufactures an electric motor that it uses in several of its products. Management is considering whether to continue manufacturing the motors or to buy them from an outside source. The following information is available 1. The company needs 12,000 motors per year. The motors can be purchased from an outside supplier at a cost of $21 per unit. 2. The unit cost of manufacturing the motors is $35, computed as follows Direct materials Direct labor Factory overhead: $ 96,00e 126,6ee 9e,ee0 114,000 $428,00e $III 35 Variable Fixed Total manufacturing costs cost per unit ($420,000 ÷ 12,eee units) 3. Discontinuing of the variable factory overhead costs. 4. If the motors are purchased from an outside source, machinery used in the production of motors will be sold at its book value Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $6,000 in fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discontinuing the production of motors. the manufacture of motors will eliminate all the raw materials and direct labor costs but will eliminate only 75 percent Rray1 f 4 Next>

Answer 1

Schedule showing Incremental Analysis
	Make	Buy	Incremental
Manufacturing Costs	(a)	(b)	(a-b)
Direct materials	$96,000.00	$0.00	$96,000.00
direct labor	$1,20,000.00	$0.00	$1,20,000.00
Manufacturing Overhead Cost			$0.00
variable	$90,000.00	$22,500.00	$67,500.00
fixed	$1,14,000.00	$1,08,000.00	$6,000.00
cost to purchase	$0.00	$2,52,000.00	-$2,52,000.00
Total	$4,20,000.00	$3,82,500.00	$37,500.00
a-2, It' recommended to buy the the Motor from Outside Source because Incremental benefit by buying the motor from Supplier will be $37500

b-1: Effect of alternative use of factory space
Incremental benefit by buying the motor from Supplier	$37,500.00
Add: : Contribution Margin from Trimmer ( 4000 * $8)	$32,000.00
Total Incremental Benefit	$69,500.00

b-2: No because as per original and new assumption also it's beneficial to Buy the product