Christian Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\
\text { Direct materials } & \$ 3.00 \
\text { Direct labor } & 5.00 \
\text { Variable factory overhead } & 4.00 \
\text { Fixed factory overhead } & \underline{2.00} \
\text { Total costs } & \$ 14.00
\end{array}$
The fixed factory overhead costs are unavoidable.Another company has offered to sell 5,000 units of the same part to Christian Company for $15 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Christian Company should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part and rent facilities to save $5,000
D) buy the part and rent facilities to save $15,000

Question

Quizplus · Accepted Answer

If Christian Company buys the part for $15 per unit for 5,000 units, the total cost would be $75,000. Making the part costs $14 per unit excluding the fixed costs which are unavoidable, resulting in a total of $70,000 for 5,000 units. However, by renting out the facilities for $20,000 a year, the company effectively reduces its costs, making the option to buy and rent more financially beneficial by $5,000 ($20,000 rent income - $5,000 additional cost to buy parts).

Christian Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Unavoidable