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Higher or lower will NET INCOME be if Barrus

Barrus is a profitable company that makes 30,000 motors annually that used in the production of their power lawn mowers. The cost per motor at this level of activity is as follows:

Direct Materials $9.50
Direct Labor $8.60
Variable manufacturing overhead $3.75

Fixed Manufacturing overhead costs amount to $120,000

This motor has recently become available from an outside supplier for $25 per motor. If Barrus decides not to make the motors, the motor production facilities can be leased out for $100,000 per year and 50% of the $120,000 of the fixed manufacturing overhead costs will be avoidable. All variable manufacturing overhead is avoidable in the event Barrus terminates motor production. How much higher or lower will NET INCOME be if Barrus decides to continues making the motor rather than purchasing the motor from the outside supplier assuming a volume production of 30,000 units?

a) 5500 lower
b) 74500 higher
c) 65500 lower
d) 125500 lower
e) none of the above

Solution Preview

Relevant cost savings if order is placed to outside supplier
Direct Materials $9.50
Direct Labor ...

Solution Summary

The solution examines if higher or lower will net income for Barrus.