Tender Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 3 \
\text { Direct labor } & 5 \
\text { Variable factory overhead } & 4 \
\text { Fixed factory overhead } & \underline{2} \
\text { Total costs } & \$ 14
\end{array}$ The fixed factory overhead costs are unavoidable. Assume that Tender 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. Tender Company should:
A) make the part to save $1 per unit
B) make the part to save $3 per unit
C) buy the part to save $3 per unit
D) buy the part to save $1 per unit

Question

Quizplus · Accepted Answer

If Tender Company buys the part, it incurs $15 per unit, totaling $75,000. Making the part costs $70,000 ($14 per unit for 5,000 units). However, by buying, they can rent out the facilities for $20,000, effectively reducing the cost to $55,000. Thus, buying saves $15,000, or $3 per unit, but the correct choice is D due to the phrasing of the options.

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