Answer to Question #166426 in Economics for Ibukunoluwa Oyedotun

Question

A vacuum manufacturer has prepared the following cost data for manufacturing one of its engine components based on the annual production of 50,000 units.

DescriptionCost per MonthDirect Materials  $75,000Direct Labor$100,000Total$175,000

In addition, variable factory overhead is applied at $7.50 per unit. Fixed factory overhead is applied at 150% of direct labor cost per unit. The vacuums sell for $150 each. A third party has offered to make the engines for $60 per unit. 75% of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company make or buy the engines?

Answer 1

$$Q=50000$$

$$VC=75000+100000+7,5\times50000=550000$$

$$FC=1.5 \times \frac{100000}{50000}+0.75\times(30000+375000)=333750$$

$$TC=FC+VC=550000+333750=883750$$

$$TR=p\times Q=150\times50000=7500000$$

If you buy motors from another company, then

$$VC=550000+60\times50000=3550000$$

Conclusion: motors must be produced independently