Peluso company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. peluso's plant manager is considering making the headlights now being purchased from an outside supplier for $11 each. the peluso plant has idle equipment that could be used to manufacture the headlights. the design engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. a decision by peluso company to manufacture the headlights should result in a net gain (loss) for each headlight of:

Net gain of $0.40 per headlight. Let's calculate how much it will cost Peluso to make each headlight. First, let's add the direct labor and materials costs $3 + $4 = $7 Now let's add the manufacturing overhead that would actually be affected by making head lights. Since 40% is unaffected, we need to multiply the overhead by 100% - 40% = 60% before attributing that cost to the headlights. So $6 * 0.60 = $3.60 And let's add that to the current cost of making the headlight $7 + $3.60 = $10.60 And finally, let's subtract that from the cost of the headlight if outsourced. $11 - $10.60 = $0.40 So the Peluso company will save $0.40 per headlight that they manufacture themselves.

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