Bonneville Company is producing a subassembly used in the production of a product.The costs incurred for the subassembly follow:
$\begin{array}{ll}&\text { Per Unit }\
\text { Direct materials } & \$ 6.00 \
\text { Direct labor } & 4.00 \
\text { Variable factory overhead } & 1.00 \
\text { Fixed supervisor salary } & 3.00 \
\text { Depreciation expense on factory equipment } & 2.00 \
\text { General fixed factory overhead allocated } & \underline{5.00} \
\text { Total costs } & \$ 21.00
\end{array}$
The above per unit costs are based on 8,000 units.An outside supplier will provide 8,000 subassemblies for $19 per unit.The supervisor will be terminated if the subassemblies are not produced in house.The idle factory will be used to manufacture another product with a contribution margin of $60,000.What should Bonneville do?
A) make the subassemblies and save $20,000
B) make the subassemblies and save $40,000
C) buy the subassemblies and save $20,000
D) buy the subassemblies and save $40,000

Question

Quizplus · Accepted Answer

Buying the subassemblies for $19 per unit results in a total cost of $152,000 (8,000 units * $19), compared to the total in-house production cost of $168,000 (8,000 units * $21). However, by not producing in-house, the company can use the factory for another product with a contribution margin of $60,000. The savings from buying, therefore, are $20,000 ($168,000 - $152,000) plus the $60,000 contribution margin from the alternative use of the factory, totaling $80,000 in benefits. However, the question asks for the savings directly attributable to the decision to buy versus make, which is $20,000. The additional $60,000 is an opportunity benefit rather than a direct saving from the buy decision.

Bonneville Company Is Producing a Subassembly Used in the Production