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Financial & Managerial Accounting 18th Edition Chapter 21 Problem 21.2A

Instructions Using incremental revenue and incremental costs, compute the expected effect of accepting this special order on D. Lawrance's operating income. Briefly discuss any other factors that you believe D. Lawrance's management should con- sider in deciding whether to accept the special order. Include nonfinancial as well as financial considerations LO21-1, LO21-2, LO21-3, LO21-4 PROBLEM 21.2A Make or Buy Decision Easyuse Tool Co, manufactures an electric motor that it uses in several of its products. Manage- ment is considering whether to continue manufacturing the motors or to buy them from an outside source. The following information is available. 1. The company needs 12,000 motors per year. The motors can be purchased from an outside supplier at a cost of $21 per unit. 2. The unit cost of manufacturing the motors is $35. computed as follows. Direct materials Direct labor Factory overhead: Variable $ 96.000 120.000 Fixed ... Total manufacturing costs Cost per unit ($420,000+ 12,000 units) 90.000 114.000 $420,000 $35 3. Discontinuing the manufacture of motors will eliminate all the raw materials and direct labor costs but will eliminate only 75 percent of the variable factory overhead costs. 4. If the motors are purchased from an outside source, machinery used in the production of motors will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale Mobile Sera 945 of this machinery would also eliminate 56,000 taxes. No other reductions in fixed factory overhead will result from discontinuing the produe fixed costs associated with depreciation and tion of motors Instructions i. Prepare a schedule in the format illustrated in Exhibit 21-6 to determine the incremental cost or benefit of buying the motors from the outside supplier. Using this schedule, would you recommend that the company manufacture the motors or buy them from the outside source? b. Assume that if the motors are purchased from the outside source, the factory space previously used to produce motors can be used to manufacture an additional 4.000 power trimmers per year. Power trimmers have an estimated contribution margin of $8 per unit. The manufacture of the additional power trimmers would have no effect on fixed factory overhead. Would this new assumption change your recommendation as to whether to make or buy the motors? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying the motors from the outside source and using the factory space to produce additional power trimmers

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