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S Corporation makes 43,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity is: Direct materials $ 10.20 Direct labor $ 9.20 Variable manufacturing overhead $ 3.80 Fixed manufacturing overhead $ 4.75 An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to S Corporation for this motor is $26.05. If S 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:

Sagot :

The annual financial advantage is $438,600.

What is Variable manufacturing overhead?

  • The running expenses of a business that change according to the volume of sales or production are known as variable overhead.
  • Variable overhead goes along with changes in production output.

What is Fixed manufacturing overhead?

  • The real cost of manufacturing is incurred and is unaffected by variations in production volume.
  • Examples include real estate taxes, rent, equipment, and building depreciation, as well as the salary of manufacturing managers.

What is Variable cost?

  • An expense for the company that varies according to how much is produced or sold is called a variable cost.
  • Depending on a company's production or sales volume, variable costs grow or fall.
  • They climb as production rises and reduce as production declines.

Solution -

To find the annual financial advantage divide Cost of Making Cost of Buying Increase by the Decrease in Income Direct materials.

Cost of Making Cost of Buying Increase / the Decrease in Income Direct materials.

43000 / 10.2 = 438,600

Therefore, the annual financial advantage is $438,600.

Know more about Variable manufacturing overhead here:

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