Regis Company manufactures plugs at a cost of $36 per unit, which includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually (as part of a larger product it produces). Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead cost will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.
If Regis Company purchases the plugs but does not rent the unused facility, the company would:
A) Save $3.00 per unit.
B) Lose $6.00 per unit.
C) Save $2.00 per unit.
D) Lose $3.00 per unit.
E) Save $1.00 per unit.

Question

Quizplus · Accepted Answer

The cost to manufacture a plug is $36, which includes $8 of fixed overhead. If Regis buys the plugs for $33 each, it appears to save $3 per unit. However, only $60,000 of the fixed overhead would be eliminated, which is $2 per unit ($60,000 / 30,000 units). Therefore, the actual saving per unit is $1 ($3 - $2). Since the question asks about the scenario where the facility is not rented out, the savings from not incurring the $8 fixed overhead per unit are not fully realized, only the $2 per unit savings from the eliminated fixed overhead are. Thus, instead of saving $3 per unit, the company effectively loses $3 per unit by not manufacturing the plugs themselves when considering the fixed costs that are not eliminated.

Regis Company Manufactures Plugs at a Cost of $36 Per