Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased from outside supplier for £11.00 each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires £4.00 of direct materials, £3.00 of direct labour, and £6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of

Question

Quizplus · Accepted Answer

The cost to manufacture each headlight is £4.00 (materials) + £3.00 (labour) + £3.60 (variable overhead, since 60% of £6.00 is variable) = £10.60. Since the purchase cost is £11.00, manufacturing in-house results in a net gain of £0.40 per headlight.

Peluso Company, a Manufacturer of Snowmobiles, Is Operating at 70