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.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,Smith will save $4 per unit in fixed costs.Based on this information,should Smith Co.make or buy the sunglasses and how much will they save?
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.
= 100,000 x ($44-36-4)= $400,000

Question

Quizplus · Accepted Answer

Smith Co. should make the sunglasses in order to save $400,000. The cost of making one unit by Smith Co. is $54 ($18 fixed cost + $36 variable cost) and the cost of buying the sunglasses from the supplier is $44. Therefore, Smith Co. will save $10 per unit ($54 - $44) if they buy from the supplier. Additionally, Smith Co. will save $4 per unit in fixed costs if they buy from the supplier. Therefore, the total savings will be $14 per unit ($10 + $4). Since Smith Co. needs 100,000 units, their total savings will be $400,000.

Smith Co ,Maker of High-Quality Eyewear,incurs Fixed Costs of $18 and and Variable