Hoopster Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 108,000 \
\text { Direct labor } & 156,000 \
\text { Variable factory overhead } & 72,000 \
\text { Fixed factory overhead } & \underline{168,000} \
\text { Total costs } & \underline{\$ 504,000} \
\end{array}$ Of the fixed factory overhead costs, $72,000 are avoidable. Knight Company has offered to sell 5,000 units of the same part to Hoopster for $86.40 per unit. Assuming there is no other use for the facilities, Hoopster Company should:
A) make the part to save $4.80 per unit
B) make the part to save $14.40 per unit
C) buy the part to save $14.40 per unit
D) buy the part to save the company $72,000

Question

Quizplus · Accepted Answer

The cost to make the part is $504,000, but $72,000 of fixed costs are avoidable, making the relevant cost $432,000. Buying the part costs $432,000 (5,000 units x $86.40). Thus, making the part saves $4.80 per unit ($432,000 - $432,000 = $0 savings, but $504,000 - $432,000 = $72,000 savings, or $14.40 per unit, but considering avoidable costs, it's $4.80 per unit).

Hoopster Company Produces a Part That Is Used in the Manufacture