Goldwater Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Olson Company has offered to sell 10,000 units of the same part to Goldwater Company for $60 per unit.The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit.No additional fixed costs would be incurred with the new product.Goldwater Company should ________.
A)make the part to save $10,000
B)make the part to save $90,000
C)make the new product and buy the part to save $90,000
D)make the new product and buy the part to save $110,000

Question

Goldwater Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows:  The fixed factory overhead costs are unavoidable.Olson Company has offered to sell 10,000 units of the same part to Goldwater Company for $60 per unit.The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit.No additional fixed costs would be incurred with the new product.Goldwater Company should ________.
A)make the part to save $10,000 
B)make the part to save $90,000 
C)make the new product and buy the part to save $90,000 
D)make the new product and buy the part to save $110,000

Quizplus · Accepted Answer

The annual cost of manufacturing the part is $90 per unit, which amounts to a total cost of $900,000 for 10,000 units. On the other hand, Olson Company is offering to sell the same part for $60 per unit, which amounts to a total cost of $600,000 for 10,000 units. By buying the part from Olson Company, Goldwater Company can save $300,000 ($900,000 - $600,000).

Furthermore, if Goldwater Company decides to use the facilities to make 10,000 units of the new product, it can generate a contribution margin of $20 per unit. This amounts to a total contribution margin of $200,000 ($20 x 10,000). Since no additional fixed costs would be incurred with the new product, the total savings from buying the part and making the new product would be $500,000 ($300,000 + $200,000).

Therefore, the best choice for Goldwater Company is to make the new product and buy the part to save $110,000 ($500,000 - $390,000, which is the cost of making the part without buying it).

Goldwater Company Manufactures a Part for Its Production Cycle