Question

Mighty Safe Fire Alarm is currently buying 58,000 motherboards from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $32 per unit; direct labor, $11 per unit; and variable factory overhead, $14 per unit. Fixed costs for the plant would increase by $83,000. Which option should be selected and why?

a. make, $381,060 increase in profits

b. make, $464,000 increase in profits

c. buy, $83,000 more in profits

d. buy, $381,060 more in profits

Answer 1

Solution:

Mighty Safe Fire alarm
	Make	Buy	Net Income Increase (Decrease) in Making
Direct Material	$18,56,000	$0	-$18,56,000
Direct Labor	$6,38,000	$0	-$6,38,000
Variable manufacturing overhead	$8,12,000	$0	-$8,12,000
Fixed manufacturing cost	$83,000	$0	-$83,000
Purchase Price	$0	$37,70,000	$37,70,000
Total Cost	$33,89,000	$37,70,000	$3,81,000

Since making has less cost therefore "Make option" should be selected due to $381000 increase in profits.