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Crafty tools manufacture an electric motor that it uses in several of its products. Management is considering whether to continue manufacturing the motors or buy
Crafty tools manufacture an electric motor that it uses in several of its products. Management is considering whether to continue manufacturing the motors or buy them from an outside source. The following information is available:... 1. The company needs 10,000 motors per year. The motors can be purchased from an outside supplier at a cost of $20 per unit.... 2. The unit cost of manufacturing 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... Costs per unit ($420,000 / 10,000 units) = $42... 3. Discontinuing the manufacture of motors will eliminate all the raw materials and direct labor costs but will eliminate only 75percent of the variable factory overhead costs.... 4. If the motors are purchased from the outside source, machinery used in the production of motors will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $4,000in fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discounting the production of motors..... Instructions.... a. Prepare a schedule in the format illustrated to determine the incremental costs or benefit of buying the motors from the outside supplier. Using the schedule, would you recommend that the company manufacture the motors or buy them from the outside source?..... The schedule should look like this:... Manufacturing costs for 10,000 units: Make the part = ? ... Buy the part =
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