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.

Question

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.

Quizplus · Accepted Answer

The cost to make the motors is the sum of direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead per motor, which equals £9.50 + £8.60 + £3.75 + £4.35 = £26.20 per motor. The cost to buy the motors is £25 per motor. Therefore, making the motors is £1.20 more expensive per motor than buying them. For 30,000 motors, the difference is 30,000 motors * £1.20 = £36,000. Since making the motors is more expensive, the company's net operating income will be £36,000 lower if they make the motors instead of purchasing them.

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