Houser Corporation manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 32 \
\text { Direct labour } & 40 \
\text { Variable overhead } & 16 \
\text { Fixed overhead } & 32 \
\text { Total } & \$ 120
\end{array}$$ Kingston Company has offered to sell Houser Corporation 5,000 units of the part for $112 per unit.If Houser Corporation accepts Kingston Company's offer,total fixed costs will be reduced to $60,000.Which alternative is more desirable,and by what amount is it more desirable? Alternative Amount

Question

Houser Corporation manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 32 \
\text { Direct labour } & 40 \
\text { Variable overhead } & 16 \
\text { Fixed overhead } & 32 \
\text { Total } & \$ 120
\end{array}$$ Kingston Company has offered to sell Houser Corporation 5,000 units of the part for $112 per unit.If Houser Corporation accepts Kingston Company's offer,total fixed costs will be reduced to $60,000.Which alternative is more desirable,and by what amount is it more desirable? Alternative Amount

Quizplus · Accepted Answer

If Houser makes the part, the total cost is $600,000 ($120 x 5,000). If they buy, the cost is $560,000 ($112 x 5,000) plus $60,000 fixed costs, totaling $620,000. Making the part saves $20,000.

Houser Corporation Manufactures a Part for Its Production Cycle Kingston Company Has Offered to Sell Houser Corporation 5,000 Units