Smith Co., maker of high-quality eyewear, incurs fixed costs of $18 and variable costs of $36 in making one unit of its matrix line of sunglasses, based on current demand of 100,000 units per year. Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $44 each. If Smith accepts the offer of the supplier, it will save $4 per unit in fixed costs. Based solely on this information, what is the recommended decision and how much will be saved based on this decision?
A) Smith Co. should buy the sunglasses in order to save $200,000.
B) Smith Co. should buy the sunglasses in order to save $500,000.
C) Smith Co. should make the sunglasses in order to save $400,000.
D) Smith Co. should make the sunglasses in order to save $300,000.

Question

Quizplus · Accepted Answer

Smith Co.'s current cost per unit is $18 (fixed) + $36 (variable) = $54. If they buy the sunglasses at $44 each, they save $10 per unit. However, they also save $4 per unit in fixed costs, making the total savings $14 per unit. For 100,000 units, the total savings would be $14 * 100,000 = $1,400,000. But this calculation overlooks the fact that the fixed cost savings of $4 per unit is already considered in the reduced cost from $54 to $44, leading to an incorrect total savings calculation. The correct approach is to compare the total costs directly: Making the sunglasses costs $54 per unit, while buying them costs $44 per unit, leading to a savings of $10 per unit. For 100,000 units, the savings would be $10 * 100,000 = $1,000,000. However, none of the options correctly reflects this calculation, indicating a misunderstanding in the explanation process. The correct decision, based on the options provided, should be calculated by comparing the total costs of making versus buying, including the fixed cost savings if applicable. Given the error in the initial explanation, let's correctly calculate the savings based on the provided options and information:- Making cost per unit: $54 ($18 fixed + $36 variable).- Buying cost per unit: $44.- Fixed cost savings if bought: $4 per unit on 100,000 units = $400,000.If Smith Co. buys the sunglasses, they spend $44 per unit instead of making them at $54 per unit, saving $10 per unit. However, the fixed cost saving of $4 per unit is misleading in the context as it's not an additional saving per unit on top of the $10 saved by buying instead of making. The actual comparison should be between the total cost of making versus buying, without double-counting the fixed cost savings.The correct calculation without considering the incorrect fixed cost saving interpretation is:- Savings by buying: $10 per unit * 100,000 units = $1,000,000.Given the misunderstanding in the explanation and the options provided, it seems there was a mistake in the calculation or interpretation of the savings and decision recommendation. The correct decision should be based on the actual cost savings of buying over making, considering all costs correctly.

Smith Co, Maker of High-Quality Eyewear, Incurs Fixed Costs of $18