Rochester Company makes a product called Z3 as part of its manufacturing process.The variable costs of making Z3 are as follows:
Direct materials $8
Direct labor $12
Variable overhead $20
The Toronto Corp. has offered to sell 10,000 units of Z3 to Rochester at a price of $40 per unit. If Rochester agrees to this deal, Rochester will also be able to reduce its fixed costs by $50,000. Rochester should:
A) Make Z3: The savings are $50,000.
B) Make Z3: The savings are $100,000.
C) Buy Z3: The savings are $100,000.
D) Buy Z3: The savings are $50,000.
E) There is no difference in profits between making or buying Z3.

Question

Quizplus · Accepted Answer

To determine whether Rochester should make or buy Z3, we calculate the total cost of both options. Making Z3 costs $40 per unit (direct materials $8, direct labor $12, variable overhead $20). Buying Z3 costs $40 per unit as well. However, buying allows Rochester to reduce fixed costs by $50,000, making buying the cheaper option by $50,000.

Rochester Company Makes a Product Called Z3 as Part of Its