Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased from outside supplier for $11.00 each.
The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of manufacturing overhead.
Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision.
A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of:
1) $(2.00).
2) $1.60.
3) $0.40.
4) $2.80.