Finch 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. Scalding Corporation has offered to sell 5,000 units of the same part to Finch Company for $15 a unit. Assuming no other use for the facilities, Finch Company should:
A) buy from Scalding Corporation to save $3 per unit
B) make the part to save $1 per unit
C) make the part to save $3 per unit
D) buy from Scalding Corporation to save $1 per unit

Question

Quizplus · Accepted Answer

The fixed factory overhead costs are unavoidable, so they should not be considered in the decision-making process. The relevant costs are the variable costs, which are $11 per unit. The cost to make the part is $14 per unit. Therefore, Finch Company should buy the part from Scalding Corporation to save $3 per unit.

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