San Antonio Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: Amarillo Company has offered to sell San Antonio Corporation 5,000 units of the part for $112 per unit. If San
Antonio Corporation accepts Amarillo Company's offer, total fixed costs will be reduced to $60,000. What alternative is more desirable and by what amount is it more desirable?
Alternative Amount
A) Buy $100,000
B) Buy $40,000
C) Make $20,000
D) Make $120,000

Question

San Antonio Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of this part are as follows:  Amarillo Company has offered to sell San Antonio Corporation 5,000 units of the part for $112 per unit. If San
Antonio Corporation accepts Amarillo Company's offer, total fixed costs will be reduced to $60,000. What alternative is more desirable and by what amount is it more desirable?
Alternative Amount
A) Buy $100,000 
B) Buy $40,000 
C) Make $20,000 
D) Make $120,000

Quizplus · Accepted Answer

To determine the most desirable alternative, we need to compare the costs of each option.

Option A: Buy from Amarillo Company for $112 per unit 
Total cost = 5,000 x $112 + $60,000 (reduced fixed costs) = $680,000

Option B: Buy from Amarillo Company for $112 per unit 
Total cost = 5,000 x $112 + $60,000 (reduced fixed costs) - $100,000 (savings from not making the part) = $380,000

Option C: Make the part 
Total cost = 5,000 x $70 + $100,000 (fixed costs) = $450,000

Option D: Make the part 
Total cost = 5,000 x $70 + $120,000 (fixed costs) - $20,000 (savings from not buying the part) = $430,000

Therefore, the most desirable option is C, making the part. This option has the lowest total cost of $450,000. Buying from Amarillo Company (options A and B) is more expensive, and making the part with the original fixed costs (option D) is only slightly less expensive than buying from Amarillo Company. Option C provides the highest cost savings.

San Antonio Corporation Manufacturers a Part for Its Production Cycle