Electric Scooter Co makes motorized scooters for city commut

Electric Scooter Co. makes motorized scooters for city commuters. The scooters can be charged using a regular household plug, and the batterie:s hold their charge for 24 hours. The manufacturing plant is currently operating at 70% capacity. The plant manager is considering manufacturing headlights for the scooters, which are currently being produced by an outside company and purchased by Electric Scooter for $11 each. Electric Scooter has the equipment and the workforce to produce the headlights. The engineers have suggested a variable cost of $3 in direct labour and $4 in direct materials. The plant overhead rate is 200% of direct labour dollars, and 40% of the overhead is fixed cost. Requirea: 1-a.Calculate the incremental profit to producing the one headlight. (Do noft round intermediate calculation and round your final answer to 2 decimal places.) ncremen rofit headlight 1-b.Should Electric Scooter make the headlights in-house? O Yes No

Solution

1a) Calculate incremental profit per headlight :

Incremental profit = 0.40 per headlight

1b) Yes Electric scooter should make the headlight in house

	Make	Buy
Direct material	4
Direct labour	3
Variable overhead (3*200%*60%)	3.6
Purchase cost		11
Total relevant cost	10.6	11