Houser Corporation manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: 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
$$\begin{array} { l r }
\text { Direct materials } & \$ 32 \
\text { Direct labour } & 40 \
\text { Variable overhead } & 16 \
\text { Fixed overhead } & 32 \
\text { Total } & \$ 120
\end{array}$$
A)Make $20,000
B)Make $120,000
C)Buy $40,000
D)Buy $100,000

Question

Houser Corporation manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: 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
$$\begin{array} { l r } 
\text { Direct materials } & \$ 32 \
\text { Direct labour } & 40 \
\text { Variable overhead } & 16 \
\text { Fixed overhead } & 32 \
\text { Total } & \$ 120
\end{array}$$
A)Make $20,000
B)Make $120,000
C)Buy $40,000
D)Buy $100,000

Quizplus · Accepted Answer

Make $20,000To determine the more desirable alternative, we compare the cost of making the part in-house to the cost of buying the part. The current total cost per unit for making the part is $120 (sum of direct materials, direct labor, variable overhead, and fixed overhead per unit). For 5,000 units, the total cost is $120 * 5,000 = $600,000. If Houser Corporation buys the part, the cost is $112 * 5,000 = $560,000, plus the reduced fixed costs of $60,000, totaling $620,000. However, the fixed overhead per unit ($32) is based on the original fixed costs before the reduction. The original fixed costs are not given, but we can infer that the reduction in fixed costs would decrease the total cost of making the part. The correct approach involves comparing the variable costs of making the part plus the new fixed costs to the cost of buying the part. The variable costs of making (direct materials, direct labor, and variable overhead) total $88 per unit ($32 + $40 + $16), leading to $88 * 5,000 = $440,000 for 5,000 units. Adding the reduced fixed costs of $60,000 gives a total make cost of $500,000. Therefore, making is cheaper than buying by $620,000 - $500,000 = $120,000. However, the calculation provided in the explanation was incorrect, leading to a misunderstanding of the correct answer. The correct calculation should compare the total costs accurately, considering the reduction in fixed costs when making the decision. The explanation mistakenly calculated the savings without accurately accounting for the reduction in fixed costs and the total cost of buying. The correct approach is to calculate the total cost of both options accurately, considering all variable and fixed costs.

Houser Corporation Manufactures a Part for Its Production Cycle A)Make $20,000 B)Make $120,000 C)Buy $40,000 D)Buy $100,000

Houser Corporation Manufactures a Part for Its Production Cycle A)Make $20,000
B)Make $120,000
C)Buy $40,000
D)Buy $100,000