Crispy Company manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $\begin{array} {ll}
\text {Direct materials}&\$3\
\text {Directlabor}&5\
\text {Variable factory overhead}&4\
\text {Fixed factory overhead}&2\
\text {Total costs}&\$14\
\end{array}$ The fixed factory overhead costs are unavoidable.Assume that Crispy Company has been offered 5,000 units of the part from another producer for $15 each.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Crispy Company should _____.
A)make the part to save $1 per unit
B)buy the part to save $3 per unit
C)buy the part to save $1 per unit
D)make the part to save $3 per unit

Question

Quizplus · Accepted Answer

Buying the part for $15 each would eliminate the variable costs of $12 ($3 direct materials + $5 direct labor + $4 variable factory overhead) but not the fixed costs of $2 per unit, which are unavoidable. However, by renting out the facilities for $20,000 a year, Crispy Company effectively reduces its costs by this amount. When comparing making versus buying, the cost to make is $14 per unit (including the unavoidable fixed cost), but when considering the opportunity to rent out the facilities, the effective saving is $20,000 / 5,000 units = $4 per unit. This reduces the effective cost of making the part to $10 per unit ($14 - $4), making buying at $15 per unit $5 more expensive, not saving $1 per unit as initially calculated without considering the rental income. The correct calculation should consider the opportunity cost of not renting out the facilities, which was overlooked in the initial explanation. Therefore, the correct analysis should compare the total cost of making (including fixed costs and subtracting the opportunity cost of renting out the facility) versus buying.

Crispy Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Unavoidable