Lakers Company manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $\begin{array} {ll}
\text {Direct materials}&\$3\
\text {Directlabor}&5\
\text {Variable factory overhead}&4\
\text {Fixed factory overhead}&2\
\text {Total costs}&\$14\
\end{array}$ The fixed factory overhead costs are unavoidable.Assume that Lakers Company has been offered 5,000 units of the part from another producer for $14 each.The facilities currently used could be used to make 5,000 units of a product that would contribute $5 a unit to fixed expenses.No additional fixed costs would be incurred.Lakers Company should _____.
A)make the new product and buy the part to earn an extra $3 per unit contribution to profit
B)make the new product and buy the part to earn an extra $1 per unit contribution to profit
C)continue to make the part to earn an extra $1 per unit contribution to profit
D)continue to make the part to earn an extra $3 per unit contribution to profit

Question

Quizplus · Accepted Answer

The company should make the new product and buy the part to earn an extra $3 per unit contribution to profit. The fixed factory overhead costs are unavoidable, so they will be incurred regardless of whether the company makes the part or buys it. By buying the part, the company can avoid the variable costs of $11 per unit (direct materials, direct labor, and variable factory overhead). The company can then use the facilities currently used to make the part to make 5,000 units of a product that would contribute $5 a unit to fixed expenses. This would result in an extra $3 per unit contribution to profit.

Lakers Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Unavoidable