A company manufactures an electric motor that is uses inseveral of its porducts. Management is considering whether tocontinue manufacturing the motors or to buy them from an outsidesource.
Information:
1. The company needs 10,00 motors per year. The motorscan 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 allthe raw materials and direct labor cost, but will eliminate only75% 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 willalso eliminate $4,000 in fixed costs associated with depreciationand taxes. No other reduction in fixed factory costs willresult 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 manufacturethe motors or buy them from an outside source?