Bull Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 3 \
\text { Direct labor } & 5 \
\text { Variable factory overhead } & 4 \
\text { Fixed factory overhead } & \underline{2} \
\text { Total costs } & \underline{\$ 14} \
\end{array}$ The fixed factory overhead costs are unavoidable. Assume that Bull Company has been offered 5,000 units of the part from another producer for $14 each. The facilities currently used could be used to make 5,000 units of a product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred. Bull Company should:
A) continue to make the part to earn an extra $3 per unit contribution to profit
B) make the new product and buy the part to earn an extra $1 per unit contribution to profit
C) make the new product and buy the part to earn an extra $3 per unit contribution to profit
D) continue to make the part to earn an extra $1 per unit contribution to profit

Question

Quizplus · Accepted Answer

By making the new product and buying the part, Bull Company can earn an additional $3 per unit ($5 contribution from the new product minus $2 fixed overhead saved by not making the part).

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