Lakers Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Spalding Company has offered to sell 5,000 units of the same part to Lakers Company for $14 per unit.The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses.No additional fixed costs would be incurred with the new product.Lakers Company should ________.
A)make the part to save $1 per unit
B)make the part to save $3 per unit
C)make the new product and buy the part to save $1 per unit
D)make the new product and buy the part to save $3 per unit

Question

Lakers Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows:  The fixed factory overhead costs are unavoidable.Spalding Company has offered to sell 5,000 units of the same part to Lakers Company for $14 per unit.The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses.No additional fixed costs would be incurred with the new product.Lakers Company should ________.
A)make the part to save $1 per unit 
B)make the part to save $3 per unit 
C)make the new product and buy the part to save $1 per unit 
D)make the new product and buy the part to save $3 per unit

Quizplus · Accepted Answer

The total cost per unit to make the part is $24 ($9 variable cost + $15 fixed cost). If Lakers Company buys the part from Spalding Company for $14, they would save $10 per unit ($24 - $14).

If Lakers Company decides to make the new product instead and buys the part from Spalding Company, they would save $10 per unit on the part and earn $5 per unit on the new product, resulting in a total savings of $15 per unit ($10 + $5).

Therefore, the best choice for Lakers Company is to make the new product and buy the part from Spalding Company to save $3 per unit ($15/5,000 units).

Lakers Company Manufactures a Part for Its Production Cycle