Scott Corporation produces a part that is used in the production of one of its products. The per-unit costs associated with the annual production of 5,000 units of this part are as follows:
Direct materials $ 1.50
Direct labor $ 3.00
Variable factory overhead $ 2.00
Fixed factory overhead $ 8.00
Total costs $14.50
Smith Company has offered to sell 5,000 units of the same part to Scott Corporation for $8 per unit.
Scott should:
A) Buy the part, thereby saving $6.50 per unit.
B) Buy the part, thereby saving $40,000 annually.
C) Buy the part, thereby saving $1.50 per unit.
D) Make the part, thereby saving $3.50 per unit.
E) Make the part, thereby saving $1.50 per unit.

Question

Quizplus · Accepted Answer

Relevant costs to manufacture:
Direct materials $1.50
Direct labor 3.00
Variable factory overhead 2.00
Total $6.50/unit
Relevant cost to purchase 8.00/unit
Net cost to purchase ($1.50)
Scott should continue to make the part, saving $1.50 per unit.

Scott Corporation Produces a Part That Is Used in the Production