Bovee Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows:
The fixed factory overhead costs are unavoidable.
-Assume that Bovee can buy 10,000 units of the part from another producer for $120 each. The facilities currently used to make the part could be rented out to another manufacturer for $160,000 a year. Bovee should
A) buy the part as that would save $24 per unit.
B) buy the part as that would save $4 per unit.
C) make the part as that would save $24 per unit.
D) make the part as that would save $8 per unit.

Question

Bovee Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows:
  The fixed factory overhead costs are unavoidable.
-Assume that Bovee can buy 10,000 units of the part from another producer for $120 each. The facilities currently used to make the part could be rented out to another manufacturer for $160,000 a year. Bovee should
A) buy the part as that would save $24 per unit. 
B) buy the part as that would save $4 per unit. 
C) make the part as that would save $24 per unit. 
D) make the part as that would save $8 per unit.

Quizplus · Accepted Answer

To determine the best choice, we need to compare the cost of making the part with the cost of buying the part.

If Bovee makes the part, the total cost per unit is:
$4 (direct materials) + $6 (direct labor) + $8 (variable overhead) + $16 (fixed overhead allocated) = $34 per unit.

If Bovee buys the part, the cost is $120 per unit.

Therefore, if Bovee makes the part, they can save $86 per unit ($120 - $34). If they buy the part, they could save the fixed overhead cost of $160,000 by renting out the facilities, but this doesn't outweigh the savings of making the part.

Therefore, the best choice is to make the part, which would save $86 per unit. Answer choice D represents this option.

Bovee Company Manufactures a Part for Its Production Cycle