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:
$\begin{array}{|l|r|}
\hline\text { Direct materials } & \$ 3 \
\hline \text { Direct labor (variable cost) } & 5 \
\hline \text { Variable manufacturing overhead } & 4 \
\hline \text { Fixed manufacturing overhead } &2 \
\hline \text { Total cost } & \$ 14 \
\hline
\end{array}$

Erickson Company has offered to sell 5,000 units of the same part to Lincoln Company for $13 per unit. Assuming the company has no other use for its facilities and that the fixed manufacturing costs are unavoidable, 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:
$\begin{array}{|l|r|}
\hline\text { Direct materials } & \$ 3 \
\hline \text { Direct labor (variable cost) } & 5 \
\hline \text { Variable manufacturing overhead } & 4 \
\hline \text { Fixed manufacturing overhead } &2 \
\hline \text { Total cost } & \$ 14 \
\hline
\end{array}$

Erickson Company has offered to sell 5,000 units of the same part to Lincoln Company for $13 per unit. Assuming the company has no other use for its facilities and that the fixed manufacturing costs are unavoidable, what should Lincoln Company do?

Quizplus · Accepted Answer

The variable cost to produce the part is $12 ($5 + $4 + $3). Erickson is offering to sell the part for $13, which is more than the variable cost. Therefore, Lincoln Company should buy from Erickson and save $1.20 per unit.

Lincoln Company Produces a Part That Is Used in the Manufacture