Barrus Company Makes 30,000 Motors to Be Used in the Productions

question 25

Multiple Choice

Barrus Company makes 30,000 motors to be used in the productions of its power lawn mowers. The manufacturing cost per motor at this level of activity is as follows: $\begin{array}{lrr} \text { Direct materials } &£9.50\\ \text { Direct labour. } &£8.60\\ \text { Variable manufacturing overhead } &£3.75\\ \text {Fixed manufacturing overhead. } &£4.35\\\end{array}$

This motor has recently become available from an outside supplier for £25 per motor. If Barrus decides not to make the motors, none of the fixed manufacturing overhead would be avoidable and there would be no other use for the facilities. If Barrus decides to continue making the motor, how much higher or lower will the company's net operating income be than if the motors are purchased from the outside supplier

• A)£36,000 lower.
• B)£207,000 higher.
• C)£94,500 higher.
• D)£130,500 higher.

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Definitions:

Fixed-Proportion

A production process in which the inputs are used in fixed ratios, with no substitution possible between them.

Perfect Substitutes

Goods or services that can be used in exactly the same way, where the consumer is indifferent between the two and will choose the cheaper one.

Scale

The size, extent, or level of something, typically used in the context of production or operations to indicate magnitude or capacity.

Returns to Scale

A concept in economics that describes how the output of a firm changes as all its inputs are increased proportionally.