Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:

-Assume Lincoln Company can purchase 5,000 units of the part from Allgood Company for $14 each, and the facilities currently used to make the part could be used to manufacture 5,000 units of another product that would contribute $5 per unit to fixed costs. If no additional fixed costs would be incurred, what should Lincoln Company do?

Question

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
 
-Assume Lincoln Company can purchase 5,000 units of the part from Allgood Company for $14 each, and the facilities currently used to make the part could be used to manufacture 5,000 units of another product that would contribute $5 per unit to fixed costs. If no additional fixed costs would be incurred, what should Lincoln Company do?

Quizplus · Accepted Answer

By choosing to buy the part for $14 each and using the facilities to produce another product that contributes $5 per unit to fixed costs, Lincoln Company effectively earns an extra $3 per unit. This is because the $5 contribution from the new product minus the $2 difference (if the part costs less than $16 to make) results in a net gain.

Lincoln Company Produces a Part That Is Used in the Manufacture