The SP Company Makes 40,000 Motors to Be Used in the Production

question 101

Multiple Choice

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:
$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 5.50 \\\hline \text { Direct Labour } & \$ 5.60 \\\hline \text { Variable Manufacturing Overhead } & \$ 4.75 \\\hline \text { Fixed Manufacturing Overhead } & \$ 4.45 \\\hline\end{array}$
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 $18.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.If SP Company decides to continue making the motor,how much higher or lower would net income be than if the motors are purchased from the outside suppler? Assume that direct labour is a variable cost in this company.

• A) $86,000 higher.
• B) $92,000 lower.
• C) $178,000 higher.
• D) $276,000 higher.

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