Lancaster Industries manufactures lawn mowers, including the motor. The cost per motor is as follows:
Direct materials................... $ 5
Direct labor .........................12
Variable overhead ..................8
Fixed overhead .................... 10
Total................................ $ 35
Mitrowski Motors has offered to sell Lancaster 5,000 motors for $32 per motor. If Lancaster accepts Mitrowski's offer, the released facilities could be used to earn $10,000 in contribution margin for the manufacture of another product. In addition, 40% of fixed overhead applied to motors would be avoided.
What alternative is more desirable and by what amount?
Alternative Amount
a). Make motors ..................$ 5,000
b) Make motors................ $ 15,000
c) Buy motors ..................$ 15,000
d) Buy motors ..................$ 25,000