Star Appliance manufactures a variety of appliances which all use Part 92F.Currently,Star Appliance manufactures Part 92F itself.It has been producing 8,000 units of Part 92F annually.The annual costs of producing Part 92F at the level of 8,000 units include: $\begin{array}{|l|cc|}
\hline \text { Direct materials } & \$ 4.00 \
\hline \text { Direct labor } & \$ 4.00 \
\hline \text { Variable manufacturing overhead } & \$ 6.00 \
\hline \text { Fixed manufacturing overhead } & \$ 3.00 \
\hline \text { Total cost } & \$ 21.00 \
\hline
\end{array}$
All of the fixed manufacturing overhead costs would continue whether Part 92F is made internally or purchased from an outside supplier.Star Appliance has no alternative use for the manufacturing facilities.Roger Parts Company has offered to sell 8,000 units of Part 92F to Star Appliance for $22.00 per unit
-What should Star Appliance do?
Assuming Star Appliance can purchase 8,000 units of the part from the Roger Parts Company for $18.00 each,and the facilities currently used to make the part could be rented out to another manufacturer for $10,000 a year,what should Star Appliance do?

Question

Star Appliance manufactures a variety of appliances which all use Part 92F.Currently,Star Appliance manufactures Part 92F itself.It has been producing 8,000 units of Part 92F annually.The annual costs of producing Part 92F at the level of 8,000 units include: $\begin{array}{|l|cc|}
\hline \text { Direct materials } & \$ 4.00 \
\hline \text { Direct labor } & \$ 4.00 \
\hline \text { Variable manufacturing overhead } & \$ 6.00 \
\hline \text { Fixed manufacturing overhead } & \$ 3.00 \
\hline \text { Total cost } & \$ 21.00 \
\hline
\end{array}$
 All of the fixed manufacturing overhead costs would continue whether Part 92F is made internally or purchased from an outside supplier.Star Appliance has no alternative use for the manufacturing facilities.Roger Parts Company has offered to sell 8,000 units of Part 92F to Star Appliance for $22.00 per unit
-What should Star Appliance do?
Assuming Star Appliance can purchase 8,000 units of the part from the Roger Parts Company for $18.00 each,and the facilities currently used to make the part could be rented out to another manufacturer for $10,000 a year,what should Star Appliance do?

Quizplus · Accepted Answer

If Star Appliance buys the part for $18.00, the cost is $18.00 x 8,000 = $144,000. The cost of making the part is $21.00 x 8,000 = $168,000. By buying, they save $24,000. Additionally, they can rent out the facilities for $10,000, saving a total of $34,000. The savings per unit is $34,000 / 8,000 = $4.25. However, the correct choice is A because the savings calculation should consider only the variable costs and rental income, leading to a savings of $1.25 per unit.

Star Appliance Manufactures a Variety of Appliances Which All Use