Question

Northeastern Company needs 1.000 motors in its manufacture of automobiles It can buy the motors from ve Motors for $1 200 ach Nertheastes plant can manulacre the ts for the owing c perun Direct materials $ 500 Direct manufacturing labor Varlable manufacturing overhead Fired manufacturing overhead Total 250 250 250 $1.350 If Northeasten buys the motors from Jive, 70% of the fixed manufacturing overhead will s be incumed folows your advice Should the company make or buy the motors? How much will Nertheastem save if OA buy, save $150.000 OB. buy, save $45.000 OC make save $140.000 O D. make save $95.000

Answer 1

Cost to buy the part ( 1,000 x $ 1200 )		$        1,200,000
Relevant costs to make :
Variable costs:
Direct materials  [ 1000 x 500 ]	$           500,000
Direct manufacturing overhead [ 1000 x 250 ]	$           250,000
Variable manufacturing overhead [ 1000 x 250 ]	$           250,000
Total	$        1,000,000
Avoidable fixed costs: [ $350 x 1000 x 30% ]	$           105,000	$        1,105,000
Savings if  part is manufactured [ 1,200,000 - 1,105,000 ]		$              95,000

 

Therefore, savings would be in the part is  manufactured = $95,000

Option D is correct.

 

 

 

 

Correct answer is option D = make, save $95,000