A company manufactures an electric motor that is uses inseveral of its porducts. Management is considering whether to continue manufacturing the motors or to buy them from an outside source.
Information:
1. The company needs 10,00 motors per year. The motors can be purchased from an outside supplier at a cost of $20 perunit.
2. The unit cost of maufacturing the motors is $42, computed as follows:
direct materials...................$96,000
direct labor.........................120,000
Factory overhead:
Variable.......................... 90,000
Fixed...............................114,000
Total manufacturing costs....$420,000
Cost per unit
($420,000/10,000units)..... $42
3. Discontinuing manufaction of the motors will eliminate all the raw materials and direct labor cost, but will eliminate only 75% of the varaiable factory overhead cost.
4. If the motors are purchased from an outside source, machinery used in prodcution of the motors will be sold at bookvalue, no gain or loss recognized. The sale of the machinery will also eliminate $4,000 in fixed costs associated with depreciation and taxes. No other reduction in fixed factory costs will result from stopping production.
Question: Prepare a schedule to determine the incremental cost or benefit of buying the motors from an outside supplier. Based on this schedule, would you recommend the company manufacture the motors or buy them from an outside source?