The Williams Company currently produces 20,000 units of part B13. Current costs

Question

The Williams Company currently produces 20,000 units of part B13. Current costs for part B13 are as follows:
Direct materials $12
Direct labor 9
Factory rent 7
Administrative 6
General factory overhead 7
Total $41

If the company decides to buy part B13, 50% of the administrative costs would be avoided. All of the Williams Company items (including this part) are manufactured in the same rented production facility.

The company has an offer from a wholesaler to purchase the part for $31 per unit. If the company decides to accept the offer:
Answer


the cost for this part will increase by $7 per unit.

the cost for this part will increase by $10 per unit.

the cost for this part will decrease by $10 per unit.

the cost for this part would be the same whether they continue to make it or buy it from an outside supplier.

Explanation / Answer

Answer If the company decide to buy from wholesaler, the saving will be Direct materials $12 Direct labor 9 Administrative 3 General factory overhead 7 Total $31 And this is equal to the offered purchase price. Therefore -- the cost for this part would be the same whether they continue to make it or buy it from an outside supplier.

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