Reference no: EM131766456

Question:

AFM Company makes 40,000 motors to be used in the production of its power lawn mowers.
The cost per motor at this level of activity is as follows:
direct materials .............. $12.00
direct labor .................. 9.25
variable overhead ............. 5.60
fixed overhead ................ 4.00
total ......................... $30.85

The motor has recently become available from an outside supplier for $29 per motor. If AFM purchases the motor from the outside supplier, the space that is currently being used to manufacture the motor can be rented out for $30,000 per year.

Assume that 40% of the fixed overhead costs will be eliminated if the motor is purchased from the outside supplier.

Calculate the increase in company profits if AFM Company accepts the outside suppliers offer.