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 $112 each. The current facilities could be used to make 10,000 units of a product that has a contribution margin of $40 per unit. No additional fixed costs would be incurred. Bovee should
A) make the new product and buy the part to earn an extra $8 per unit contribution to profit.
B) continue to make the part to earn an extra $8 per unit contribution to profit.
C) continue to make the part to earn an extra $24 per unit contribution to profit.
D) make the new product and buy the part to earn an extra $24 per unit contribution to profit.

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 $112 each. The current facilities could be used to make 10,000 units of a product that has a contribution margin of $40 per unit. No additional fixed costs would be incurred. Bovee should
A) make the new product and buy the part to earn an extra $8 per unit contribution to profit. 
B) continue to make the part to earn an extra $8 per unit contribution to profit. 
C) continue to make the part to earn an extra $24 per unit contribution to profit. 
D) make the new product and buy the part to earn an extra $24 per unit contribution to profit.

Quizplus · Accepted Answer

By buying the part from another producer, Bovee can save the variable cost per unit of $105 ($112 - $7). Therefore, the total savings for 10,000 units will be $1,050,000.
If Bovee uses its facilities to make the new product with a contribution margin of $40 per unit, then the total contribution margin will be $400,000 for 10,000 units.
Therefore, the total extra profit that Bovee can earn by buying the part and making the new product will be $1,450,000 ($400,000 + $1,050,000).
Hence, the best choice is to make the new product and buy the part to earn an extra $24 per unit contribution to profit.

Bovee Company Manufactures a Part for Its Production Cycle