Clinton Company manufactures a part for its production cycle.The costs per unit for 10,000 units of this part are as follows: $\begin{array}{lr}
\text { Direct materials } & \$ 20 \
\text { Directlabor } & 15 \
\text { Variable factory overhead } & 16 \
\text { Fixed factory overhead } & 10 \
\text { Total costs } & \$ 61
\end{array}$ The fixed factory overhead costs are unavoidable.Wilson Company has offered to sell 10,000 units of the same part to Clinton Company for $55 a unit.Assuming no other use for the facilities, Clinton Company should _____.
A)make the part to save $4 per unit
B)buy from Wilson to save $6 per unit
C)make the part to save $6 per unit
D)buy from Wilson to save $4 per unit

Question

Quizplus · Accepted Answer

CTo determine whether to make or buy, Clinton Company should compare the relevant costs. The fixed factory overhead is sunk and unavoidable, so it's not relevant to this decision. The relevant costs of making the part are direct materials ($20), direct labor ($15), and variable factory overhead ($16), totaling $51 per unit. Wilson's offer is $55 per unit, which is $4 more than the cost to make the part. Therefore, making the part saves $4 per unit compared to buying it.

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