Golden Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\
\text { Direct materials } & \$ 20.00 \
\text { Direct labor } & 15.00 \
\text { Variable factory overhead } & 6.00 \
\text { Fixed factory overhead } & \underline{10.00}\
\text { Total costs }&\$51.00
\end{array}$
The fixed factory overhead costs are unavoidable.Olson Company has offered to sell 10,000 units of the same part to Golden Company for $55 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.Golden Company should ________.
A) make the part to save $40,000
B) make the part to save $140,000
C) make the new product and buy the part to save $60,000
D) make the new product and buy the part to save $140,000

Question

Quizplus · Accepted Answer

The cost to make the part is $51 per unit, while buying it would cost $55 per unit, leading to an additional cost of $4 per unit for 10,000 units, or $40,000. However, by making the new product instead, Golden Company can earn a contribution margin of $20 per unit for 10,000 units, totaling $200,000. The net saving is $200,000 (from the new product) minus $40,000 (additional cost to buy the part), which equals $160,000. However, since the question asks for the savings compared to making the part, which already includes a $100,000 contribution margin (10,000 units * $10 saved per unit by not incurring the variable cost of making the part), the additional saving by choosing the new product over making the part is $60,000.

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