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Unformatted text preview: E4-23 a. Mountain Air should make the electric motor. Cost to Make Purchase price ($5.00 × 10,000) Manufacturing costs: Direct mat.($2 × 10,000) $20,000 Direct labor ($1.50 × 0.50 × 10,000) 7,500 Variable overhead ($2* × 0.50 × 10,000) 10,000 Total $37,500 Advantage of making Cost to Buy $50,000 Difference (Effect of Buying on Income) $(50,000) 20,000 7,500 _______ $50,000 10,000 $(12,500) $12,500 $ 7 per unit (5) per unit $ 2 per unit Difference (Effect of Buying on Income) $(50,000) 37,500 20,000 $ 7,500 *Total factory overhead Fixed factory overhead ($50,000/10,000) Variable factory overhead b. Mountain Air should buy the electric motor. Cost Cost to to Make Buy Purchase price $50,000 Manufacturing costs: Outlay $37,500 Opportunity 20,000 _______ Total $57,500 $50,000 Advantage of buying $ 7,500 c. Management should consider a number of nonquantitative factors in deciding whether to make or buy the motors. They should consider the quality of their own and the supplier's motors. They should also consider the dependability of the supplier. Does Mini Motor have a track record of meeting its commitments? They should also attempt to determine if Mini Motor will extend the contract to supply motors for a number of years or whether it is attempting to use some temporarily idle capacity. ...
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This note was uploaded on 05/08/2011 for the course 193431918X 711 taught by Professor Braham during the Spring '11 term at Missouri (Mizzou).
- Spring '11