Lawson Company produces a part that has the following costs per unit: Crest Corporation can provide the part to Lawson for $19 per unit. Lawson Company has determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if Lawson no longer produces the part, it can rent that portion of the plant facilities for $60,000 per year. Lawson Company currently produces 10,000 parts per year. Which alternative is preferable and by what margin?
A) Make-$20,000
B) Make-$50,000
C) Buy-$10,000
D) Buy-$40,000

Question

Lawson Company produces a part that has the following costs per unit:  Crest Corporation can provide the part to Lawson for $19 per unit. Lawson Company has determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if Lawson no longer produces the part, it can rent that portion of the plant facilities for $60,000 per year. Lawson Company currently produces 10,000 parts per year. Which alternative is preferable and by what margin?
A) Make-$20,000 
B) Make-$50,000 
C) Buy-$10,000 
D) Buy-$40,000

Quizplus · Accepted Answer

To determine the best choice, we need to compare the total cost of making the part with the cost of buying it from Crest Corporation.

Total cost of making the part:
Variable cost per unit = $11
Fixed overhead per unit = 60% of fixed overhead per year / number of units = ((60% x $60,000) / 10,000) = $3.6
Total cost per unit = $11 + $3.6 = $14.6
Total cost of making 10,000 units = $14.6 x 10,000 = $146,000

Total cost of buying the part:
Cost per unit = $19
Total cost of buying 10,000 units = $19 x 10,000 = $190,000

Therefore, the cost of buying the part from Crest Corporation is lower than the cost of making it by $44,000 ($190,000 - $146,000).

Therefore, the preferable choice is to buy the part, with a margin of $10,000 ($44,000 - $34,000 rental cost saved).

Lawson Company Produces a Part That Has the Following Costs