BirchCompany manufactures a part for its production cycle. Thecosts per unit for
ID: 2433389 • Letter: B
Question
BirchCompany manufactures a part for its production cycle. Thecosts per unit for 5,000 units of this part are asfollows:
Directmaterials $3
Directlabor 5
Variable factoryoverhead 4
Fixed factoryoverhead 4
Totalcosts $16
The fixed factoryoverhead costs are unavoidable. Spalding Corporation hasoffered to sell 5,000 units of the same part to Birch Company for$15 a unit. Assuming no other use for the facilities, BirchCompany should _____.
BirchCompany manufactures a part for its production cycle. Thecosts per unit for 5,000 units of this part are asfollows:
Directmaterials $3
Directlabor 5
Variable factoryoverhead 4
Fixed factoryoverhead 4
Totalcosts $16
The fixed factoryoverhead costs are unavoidable. Spalding Corporation hasoffered to sell 5,000 units of the same part to Birch Company for$15 a unit. Assuming no other use for the facilities, BirchCompany should _____.
A. buy from ScaldingCorp to save $1 per unit B. make the part tosave $1 per unit C. buy from ScaldingCorp to save $3 per unit D. make the part tosave $3 per unitExplanation / Answer
Correct Answer is D D. make the part tosave $3 per unit See below table. As Fixed OH is unavoidable, we can ignore it forcalculation purpose & only focus on differential costs. We can see that if Birch makes the product, it incurs a Variablecost pu = $12. If it Buys from Spalding, it pays $15 pu. Thus forevery unit, Birch pays 15-12=$3 pu extra + Incurs the Fixed OHwhich is unavoidable. So Birch should continue to make the part to save this $3 pu. Birch Costs QtyProduced 5000 Directmaterials 3 Directlabor 5 Var factoryOH 4 Variable Costpu 12 SpaldingOffer 15 Extra cost ofSpalding offer -3
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