Shickman Company makes the widgets it uses in one of its products at a cost of $8 per unit.This cost includes $2 of fixed overhead.The company needs 10,000 of these plugs annually, and Orlando Company has offered to sell them at $5 per unit.If Shickman Company purchases the plugs, the company would:
A)Increase profits by $30,000.
B)Decrease profits by $10,000.
C)Increase profits by $10,000.
D)Decrease profits by $30,000.

Question

Quizplus · Accepted Answer

If Shickman Company purchases the plugs at $5 per unit instead of making them at $8 per unit, they save $3 per unit. For 10,000 units, this results in a savings of $30,000. However, since $2 of the $8 cost is fixed overhead, this cost will remain regardless of the decision. Therefore, the actual savings is $10,000, increasing profits by this amount.

Shickman Company Makes the Widgets It Uses in One of Its