Mighty Safe Fire Alarm is currently buying 50,000 motherboard from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: Direct Materials $32 per unit, Direct labor $10 per unit, Variable Factory Overhead $16.00, Fixed Costs for the plant would increase by $75,000. Which option should be selected and why?

Question

Quizplus · Accepted Answer

To find the best choice, we need to calculate the total cost of buying 50,000 motherboards and the total cost of making 50,000 motherboards.

Total cost of buying: 
50,000 x $65 = $3,250,000

Total cost of making: 
Direct Materials: 50,000 x $32 = $1,600,000 
Direct labor: 50,000 x $10 = $500,000 
Variable Factory Overhead: 50,000 x $16 = $800,000 
Fixed costs: $75,000 
Total Cost of Making: $2,975,000

To find the profits, we need to subtract the total cost from the revenue ($65 x 50,000 = $3,250,000).

Profit for buying: $3,250,000 - $3,250,000 = $0

Profit for making: $3,250,000 - $2,975,000 = $275,000

Therefore, the best choice would be to make the motherboards because it would result in a $275,000 increase in profits.

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