Buddy Company manufactures a part for its production cycle.The costs per unit for 5,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\
\text { Direct materials } & \$ 3.00 \
\text { Direct labor } & 5.00 \
\text { Variable factory overhead } & 4.00 \
\text { Fixed factory overhead } & \underline{4.00} \
\text { Total costs } & \$ 16.00
\end{array}$
The fixed factory overhead costs are avoidable.Spalding Company has offered to sell 5,000 units of the same part to Buddy Company for $15 per unit.Assuming no other use for the facilities,Buddy Company should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part from Spalding Company to save $5,000
D) buy the part from Spalding Company to save $15,000

Question

Quizplus · Accepted Answer

The total cost to make the part is $16 per unit for 5,000 units, totaling $80,000. If Buddy Company buys the part for $15 per unit for 5,000 units, the total cost would be $75,000. Since the fixed factory overhead costs are avoidable, they should not be considered in the decision, making the relevant cost of making the part $12 per unit ($3 + $5 + $4). Thus, making the part would cost $60,000 ($12 * 5,000), and buying the part would cost $75,000, leading to a $15,000 difference. However, since the initial calculation considered the avoidable fixed costs, the correct comparison is between the total current cost of making ($80,000) and the cost of buying ($75,000), resulting in a $5,000 savings by buying the part.

Buddy Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Avoidable