The SP Company makes 40,000 motors to be used in the production of its sewing machines. The average cost per motor at this level of activity consists of:

Direct Materials	$6.00
Direct Labour	$5.50
Variable Manufacturing Overhead	$4.50
Fixed Manufacturing Overhead	$5.00
Average cost per motor	$21.00

An outside supplier recently began producing a comparable motor that could be used in the sewing machine. The price offered to SP Company for this motor is $19. If SP Company decides not to make the motors, there would be no other use for the production facilities, and total fixed factory overhead costs would not change. What is the net advantage (disadvantage) of purchasing the motors from outside supplier rather than making them? Assume that direct labour is a variable cost in this company.

Question 18Answer

a.

$120,000 net advantage

b.

$120,000 net disadvantage

c.

$80,000 net disadvantage

d.

$80,000 net advantage