Spahr 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:
$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 2.00 \
\hline \text { Direct labor } & \$ 4.00 \
\hline \text { Variable manufacturing overhead } & \$ 3.00 \
\hline \text { Fixed manufacturing overhead } & \$ 1.00 \
\hline \text { Total cost } & \$ 10.00 \
\hline \text { The fixed overhead costs are unavoidable. } & \
\hline
\end{array}$
-Erickson Company has offered to sell 5,000 units of the same part to Spahr Company for $11 per unit.Assuming the company has no other use for its facilities,what should Spahr Company do?

Question

Spahr 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:
$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 2.00 \
\hline \text { Direct labor } & \$ 4.00 \
\hline \text { Variable manufacturing overhead } & \$ 3.00 \
\hline \text { Fixed manufacturing overhead } & \$ 1.00 \
\hline \text { Total cost } & \$ 10.00 \
\hline \text { The fixed overhead costs are unavoidable. } & \
\hline
\end{array}$
-Erickson Company has offered to sell 5,000 units of the same part to Spahr Company for $11 per unit.Assuming the company has no other use for its facilities,what should Spahr Company do?

Quizplus · Accepted Answer

The relevant cost of making the part is $9 per unit (excluding the unavoidable fixed overhead of $1). Buying from Erickson costs $11 per unit, so making the part saves $2 per unit.

Spahr Company Produces a Part That Is Used in the Manufacture