Crispy Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Another company has offered to sell 5,000 units of the same part to Crispy Company for $15 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Crispy Company should ________.
A)make the part to save $1 per unit
B)make the part to save $3 per unit
C)buy the part to save $1 per unit
D)buy the part to save $3 per unit

Question

Crispy Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows:  The fixed factory overhead costs are unavoidable.Another company has offered to sell 5,000 units of the same part to Crispy Company for $15 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Crispy Company should ________.
A)make the part to save $1 per unit 
B)make the part to save $3 per unit 
C)buy the part to save $1 per unit 
D)buy the part to save $3 per unit

Quizplus · Accepted Answer

To determine the best choice, we need to compare the total cost of making the part to the total cost of buying the part.

Total cost of making 5,000 units:
Variable costs = $11 per unit x 5,000 units = $55,000
Fixed costs = $50,000
Total cost = $105,000

Total cost of buying 5,000 units:
Purchase cost = $15 per unit x 5,000 units = $75,000
Rent cost = $20,000
Total cost = $95,000

Therefore, it is more cost-effective for Crispy Company to buy the part from the other company instead of making it themselves. They can save $1 per unit or $10,000 in total by buying the part.

Crispy Company Manufactures a Part for Its Production Cycle