Parton Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Parton's plant manager is considering making the headlights now being purchased from an outside supplier for $11.00 each. The Parton plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4.00 of direct materials, $3.00 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Parton Company to manufacture the headlights should result in a net gain (loss) for each headlight of: (CMA adapted)
A) $(2.00).
B) $1.60.
C) $0.40.
D) $2.80.

Question

Quizplus · Accepted Answer

The variable cost to manufacture each headlight is $4.00 (materials) + $3.00 (labor) + $3.60 (60% of $6.00 variable overhead) = $10.60. Since the cost to purchase is $11.00, manufacturing results in a net gain of $11.00 - $10.60 = $0.40 per headlight.

Parton Company, a Manufacturer of Snowmobiles, Is Operating at 70