Barker Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
Of the fixed factory overhead costs, $60,000 is avoidable.
-Assume that Barker can buy 5,000 units of the part from another producer for $84 each. The current facilities could be used to make 5,000 units of a product that has a contribution margin of $20 per unit. Fixed factory overhead costs to produce this new product would be exactly the same as for the currently produced part. Barker should
A) continue to make the part and earn an extra $40,000 in profit.
B) buy the part and produce the new product and earn an extra $4 per unit contribution to profit.
C) continue to make the part and earn an extra $8 per unit contribution to profit.
D) buy the part and produce the new product and earn an extra $20 per unit contribution to profit.

Question

Barker Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
  Of the fixed factory overhead costs, $60,000 is avoidable.
-Assume that Barker can buy 5,000 units of the part from another producer for $84 each. The current facilities could be used to make 5,000 units of a product that has a contribution margin of $20 per unit. Fixed factory overhead costs to produce this new product would be exactly the same as for the currently produced part. Barker should
A) continue to make the part and earn an extra $40,000 in profit. 
B) buy the part and produce the new product and earn an extra $4 per unit contribution to profit. 
C) continue to make the part and earn an extra $8 per unit contribution to profit. 
D) buy the part and produce the new product and earn an extra $20 per unit contribution to profit.

Quizplus · Accepted Answer

The cost to produce 5,000 units is $490,000 ($340,000 variable + $150,000 fixed). 
The cost to buy 5,000 units at $84 each is $420,000. 
Therefore, buying the part would save $70,000 ($490,000 - $420,000). 
Furthermore, producing the new product would result in a contribution margin of $100,000 ($20 x 5,000 units). 
The fixed factory overhead costs for producing the new product are the same as for the current part, so they are not relevant to the decision. 
Therefore, Barker should buy the part and produce the new product, which results in an extra $30,000 ($100,000 - $70,000) profit.

Barker Company Produces a Part That Is Used in the Manufacture