Sunshade produces a special canvas top for its high quality aluminum gazebo. The costs to produce the 1,000 units needed each year are as follows:
Treated canvas fabric $160,000
Aluminum poles 40,000
Aluminum frame fittings 10,000
Direct labor 80,000
Variable manufacturing overhead 25,000
Fixed manufacturing overhead 65,000
Total costs $380,000
Sunshade has offered to make the needed canvas tops of comparable quality for $325 each, FOB shipping point. Sunshade would pay for shipping at a cost of $50 per unit. Sunshade's accountant has estimated that 20% of the fixed overhead can be avoided if the tops are purchased.
Sunshade should:
A) Buy the part, thereby saving $3.00 per unit.
B) Buy the part, thereby saving $5.00 per unit.
C) Buy the part, thereby saving $42.00 per unit.
D) Make the part, thereby saving $47.00 per unit.
E) Make the part, thereby saving $60.00 per unit.

Question

Quizplus · Accepted Answer

Relevant costs to manufacture:
Treated canvas fabric $160,000
Aluminum poles 40,000
Aluminum fittings 10,000
Direct labor 80,000
Variable manufacturing overhead 25,000
Fixed manufacturing overhead 13,000 ($65,000 x 20%)
Total cost to produce $328,000
Number of units 1,000
Per-unit cost $328
Relevant cost to purchase:
Per-unit cost $325
Shipping 50
Total cost to purchase $375
Net per-unit benefit to produce: $47
Sunshade should continue to make the tops, saving $47 per unit.

Sunshade Produces a Special Canvas Top for Its High Quality