Deuce Company currently produces 10,000 units of a key part at a total cost of $512,000.Variable costs are $300,000.Of the fixed cost, $140,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000.Alternately, the facilities could be rented out at $60,000.Given all of these alternatives, _____ is Deuce Company's lowest net cost per unit for the part.
A)$30
B)$48
C)$42
D)$44

Question

Quizplus · Accepted Answer

Deuce Company's current total cost per unit for the part is [(total cost - fixed cost specific to part)/units produced] 
= [($512,000 - $140,000)/10,000 units] + [($300,000)/10,000 units] 
= $37.20 
If Deuce Company purchases the part from the other manufacturer for $48 per unit, the total cost per unit is reduced to $48. 
If Deuce Company uses the facilities to manufacture a new product with an expected contribution margin of $30,000, it would be generating an additional contribution of $3 per unit ($30,000/10,000 units). Thus, the total cost per unit for the part would be ($512,000 - $140,000 - $30,000)/(10,000 units) + ($300,000)/(10,000 units) - ($3) = $44.20. 
If Deuce Company rents out the facilities for $60,000, the total cost per unit for the part would be ($512,000 - $140,000)/(10,000 units) + ($300,000)/(10,000 units) - ($6) = $42.60. 
Therefore, Deuce Company's lowest net cost per unit for the part would be $42.60, which is achieved by renting out the facilities. Thus, the best choice is C.

Deuce Company Currently Produces 10,000 Units of a Key Part