Johnson 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.Assume that Johnson Company can buy 10,000 units of the part from another producer for $60 each.The facilities currently used to make the part could be rented out to another manufacturer for $100,000 a year.Johnson Company should _____.
A)buy the part to save $2.50 per unit
B)buy the part to save $1 per unit
C)make the part to save $2.50 per unit
D)make the part to save $1 per unit

Question

Quizplus · Accepted Answer

The total cost to make the part is $61 per unit. Buying the part costs $60 per unit, saving $1 per unit. The fixed costs are sunk and do not affect the decision, but the opportunity cost of $100,000 from renting out the facilities should be considered. However, since the question focuses on the cost per unit, the direct comparison shows a $1 saving per unit by buying instead of making.

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