The Matt Truck Corp. is considering whether to continue to make steering wheels for its trucks, or whether to buy the steering wheels from an outside supplier. It can buy the gears from outside suppliers at $190 per unit. It needs 50,000 units each year. The company has the following manufacturing costs: raw materials = $130 per unit; direct labor = $20 per unit; variable overhead = $30 per unit; avoidable fixed costs of $200,000 per year and non-avoidable fixed costs of $500,000 per year. The e
A) Decrease profits by $300,000
B) Decrease profits by $200,000
C) Increase profits by $200,000
D) Increase profits by $300,000

Question

Quizplus · Accepted Answer

The cost to make each steering wheel is $180 ($130 + $20 + $30). The avoidable fixed costs are $200,000, which would be saved if buying. The cost to buy is $190 per unit. Total cost to make = ($180 * 50,000) + $200,000 = $9,200,000. Total cost to buy = $190 * 50,000 = $9,500,000. Buying increases costs by $300,000, thus decreasing profits by $300,000.