The OT Company Makes 35,000 Motors to Be Used in the the Production

question 48

Multiple Choice

The O.T. Company makes 35,000 motors to be used in the production of its sewing machines. The cost per motor at this level of activity is:Direct materials $\quad$$\quad$$£ 4.50$
Direct labour $\quad$$\quad$$£ 4.60$
Variable manufacturing overhead. $\quad$$£ 3.75$
Fixed manufac turing ov erhead. $\quad$$£ 3.45$
An outside supplier has offered to supply all the motors the company needs for £15 each. If O.T. Company decided not to make the motors, there would be no other use for the production facilities and none of the fixed manufacturing overhead cost could be avoided. If O.T. Company decides to continue making the motor, how much higher or lower would net operating income be than if the motors are purchased from the outside supplier

• A)£75,250 higher.
• B)£45,500 lower.
• C)£311,500 higher.
• D)£120,750 higher.

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Definitions:

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and attract funds, including the cost of debt and equity financing.

Market Supply

The total amount of goods or services that are available for purchase within a specific market at a given time.

Competitive Market

A market structure characterized by a large number of buyers and sellers, where no single entity can influence the market price.

Market Prices

The amount of money that a buyer is willing to pay and a seller is willing to accept for a good or service in a competitive marketplace.