Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year: Direct materials $ 20,000 Direct labor 55,000 Variable manufacturing overhead 45,000 Fixed manufacturing overhead 70,000 Total manufacturing cost $190,000 Valve Company has offered to sell Motor 10,000 units of Part M-l for $16.50 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?A. No, because it would be $5,000 cheaper to make the part.B. Yes, because it would be $10,000 cheaper to buy the part. (This is the answer)C. No, because it would be $15,000 cheaper to make the part.D. Yes, because it would be $25,000 cheaper to buy the part.E. None of the above

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Parrain Parrain · Answer 2 · 2022-03-08T12:12:31+01:00

Based on the various costs of making the parts and the cost of simply buying it, Motor Company should accept Valve Company's offer because .B. it would be $10,000 cheaper to buy the part.

The cost of making the part can be found as:

= Direct materials + Direct labor + Variable manufacturing cost +Avoidable fixed manufacturing cost + Annual rental cost

= 20,000 + 55,000 + 45,000 + 40,000 + 15,000

= $175,000

The cost of buying would be:

= (10,000 x 16.50)

= $165,000

The difference is:

= 175,000 - 165,000

= $10,000

It would therefore be cheaper by $10,000 to buy.

In conclusion, option B is correct.

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