Cruise 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 6500 units, are as follows: Assuming Cruise Company can purchase 6500 units of the part from Suri Company for $14.00 each, and the facilities currently used to make the part could be rented out to another manufacturer for $25,000 a year, what should Cruise Company do?
A)Make the part and save $6.00 per unit.
B)Make the part and save $12.50 per unit.
C)Buy the part and save $1.00 per unit.
D)Buy the part and save $1.35 per unit.

Question

Cruise 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 6500 units, are as follows:  Assuming Cruise Company can purchase 6500 units of the part from Suri Company for $14.00 each, and the facilities currently used to make the part could be rented out to another manufacturer for $25,000 a year, what should Cruise Company do?
A)Make the part and save $6.00 per unit. 
B)Make the part and save $12.50 per unit. 
C)Buy the part and save $1.00 per unit. 
D)Buy the part and save $1.35 per unit.

Quizplus · Accepted Answer

To determine the best option, we need to compare the cost of making the part to the cost of buying it, taking into account any savings resulting from renting out the facilities.

If Cruise Company makes the part, the total cost would be: 
$20,500 (fixed costs) + ($4.60 x 6,500 units) = $50,850

If Cruise Company buys the part: 
$14 x 6,500 = $91,000

If Cruise Company buys the part, it would save: 
$50,850 - $91,000 = -$40,150

This means that buying the part would result in a loss of $40,150.

However, we also need to consider the savings resulting from renting out the facilities. If Cruise Company buys the part, it can rent out the facilities for $25,000, resulting in a net savings of: 
-$40,150 + $25,000 = -$15,150

This means that even with the cost of renting out the facilities, buying the part results in a net savings of $15,150.

Therefore, the best choice is to buy the part and save $1.35 per unit.

Cruise Company Produces a Part That Is Used in the Manufacture