Eichholtz Company uses 10,000 units of a part in its production process.The costs to make a part are: direct material,$12;direct labor,$25;variable overhead,$13;and applied fixed overhead,$30.Eichholtz has received a quote of $55 from a potential supplier for this part.If Eichholtz buys the part,70 percent of the applied fixed overhead would continue.Eichholtz Company would be better off by
A)$50,000 to manufacture the part.
B)$150,000 to buy the part.
C)$40,000 to buy the part.
D)$160,000 to manufacture the part.

Question

Quizplus · Accepted Answer

The cost to manufacture the part can be calculated as follows:

Direct material cost = $12 x 10,000 units = $120,000
Direct labor cost = $25 x 10,000 units = $250,000
Variable overhead cost = $13 x 10,000 units = $130,000
Applied fixed overhead cost = $30 x 10,000 units = $300,000

Total cost to manufacture the part = $800,000

If the company buys the part from the potential supplier for $55 per unit, the total cost would be:

Cost to buy the part = $55 x 10,000 units = $550,000
Applied fixed overhead cost = $300,000 x 70% = $210,000

Total cost to buy the part = $760,000

Therefore, Eichholtz Company would be better off buying the part from the potential supplier, as it would result in a cost savings of $40,000 ($800,000 - $760,000).

Eichholtz Company Uses 10,000 Units of a Part in Its