Question

The SP Corporation makes 34,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is:

Direct materials	$	9.30
Direct labor	$	8.30
Variable manufacturing overhead	$	3.35
Fixed manufacturing overhead	$	4.30

An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Corporation for this motor is $23.35. If SP Corporation decides not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. Direct labor is a variable cost in this company. The annual financial advantage (disadvantage) for the company as a result of making the motors rather than buying them from the outside supplier would be:

Answer 1

Answer- The annual financial advantage for the company as a result of making the motors rather than buying them from the outside supplier would be =$81600.

Explanation- Cost of buying from outside supplier = $23.35 per unit*34000 units

= 793900

Relevant cost of making such motor in-house = Direct materials+ Direct labor+ Variable overhead

= ($9.30 per unit+$8.30 per unit+$3.35 per unit)*34000 units

= $712300

The annual financial advantage for the company as a result of making the motors rather than buying them from the outside supplier = Cost of buying from outside supplier- Relevant cost of making such motor in-house

= $793900-$712300

= $81600

The unavoidable fixed costs have no effect on decision making, these cost are continue to occur whether product are manufactured or purchased.