Hoover Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: $\begin{array}{ll}
\text { Direct materials } & \$ 20 \
\text { Direct labor } & 15 \
\text { Variable factory overhead } & 16 \
\text { Fixed factory overhead } & \underline{10} \
\text { Total costs } & \$ 61
\end{array}$ The fixed factory overhead costs are unavoidable. Madison Company has offered to sell 10,000 units of the same part to Hoover Company for $55 a unit. Assuming no other use for the facilities, Hoover Company should:
A) make the part to save $4 per unit
B) buy from Madison to save $6 per unit
C) buy from Madison to save $4 per unit
D) make the part to save $6 per unit

Question

Quizplus · Accepted Answer

The relevant costs for making the part are $51 (Direct materials $20 + Direct labor $15 + Variable factory overhead $16). Since the fixed factory overhead is unavoidable, it should not be considered. Buying from Madison costs $55 per unit, so making the part saves $4 per unit ($55 - $51 = $4).

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