Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65.00 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $32.00 per unit; direct labor, $10.00 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why?

Question

Quizplus · Accepted Answer

The cost to make each motherboard is $32 + $10 + $16 = $58. The total cost to make 50,000 boards is $58 * 50,000 = $2,900,000. Adding the increased fixed costs of $75,000, the total cost is $2,975,000. Buying the boards costs $65 * 50,000 = $3,250,000. Making the boards saves $3,250,000 - $2,975,000 = $275,000, thus increasing profits by $275,000.

Mighty Safe Fire Alarm Is Currently Buying 50,000 Motherboards from MotherBoard