BWM Motors currently purchases batteries from an outside supplier, which are used in the motorcycles that they manufacture. BWM pays $78 for each battery and uses 1,000 batteries per year.
BWM's management team is considering manufacturing the batteries internally and has estimated
The per unit battery cost to be as follows:
$$\begin{array} { | l | l | }
\hline \text { Direct materials } & \$ 37 \
\hline \text { Direct labor } & \$ 19 \
\hline \text { Variable manufacturing overhead } & \$ 13 \
\hline \text { Fixed manufacturing overhead } & \$ 22 \
\hline
\end{array}$$ BWM has idle capacity and can manufacture the batteries without affecting the manufacture of their
Motorcycles. Should BWM manufacture the batteries?

Question

BWM Motors currently purchases batteries from an outside supplier, which are used in the motorcycles that they manufacture. BWM pays $78 for each battery and uses 1,000 batteries per year.
BWM's management team is considering manufacturing the batteries internally and has estimated
The per unit battery cost to be as follows:
$$\begin{array} { | l | l | } 
\hline \text { Direct materials } & \$ 37 \
\hline \text { Direct labor } & \$ 19 \
\hline \text { Variable manufacturing overhead } & \$ 13 \
\hline \text { Fixed manufacturing overhead } & \$ 22 \
\hline
\end{array}$$ BWM has idle capacity and can manufacture the batteries without affecting the manufacture of their
Motorcycles. Should BWM manufacture the batteries?

Quizplus · Accepted Answer

The total cost to manufacture a battery internally is the sum of direct materials, direct labor, and variable manufacturing overhead, which equals $37 + $19 + $13 = $69 per battery. The fixed manufacturing overhead is a sunk cost in this scenario since BWM has idle capacity and it would not affect the decision. Therefore, by manufacturing internally, BWM saves $78 - $69 = $9 per battery. For 1,000 batteries, the annual increase in operating income would be $9 * 1,000 = $9,000.

BWM Motors Currently Purchases Batteries from an Outside Supplier, Which