Question

Laskowski Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:

Per Unit

Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 2.00
Total costs $14.00

The fixed factory overhead costs are unavoidable. Hendricks Company has offered to sell 5,000 units of the same part to Laskowski Company for $14 per unit. The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Laskowski Company should ________.

A) make the part to save $5,000
B) make the part to save $15,000
C) make the new product and buy the part to save $5,000
D) make the new product and buy the part to save $15,000​​​​​​​ (this is the correct answer, please explain why)

Answer 1

Answer:

D) make the new product and buy the part to save $15,000​​​​​​​

Explanation:

Total Cost to Make a Product = Cost per unit * units = 14*5,000 =70,000

Relevant cost to Buy the Product

= Cost to purchase per Unit + Fixed Overhead Per Unit - Contribution Per Unit From New Product

= $14+2 -5 = 11.00 Per Unit

Cost to Buy = 11,,00*5000 =55,000

Net Advantage to Buy = 70,000-55000 = $15,000