Potter Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\
\text { Direct materials } & \$ 20.00 \
\text { Direct labor } & 15.00 \
\text { Variable factory overhead } & 16.00 \
\text { Fixed factory overhead } & \underline{10.00} \
\text { Total costs }&\$61.00
\end{array}$
The fixed factory overhead costs are unavoidable.Paulson Company has offered to sell 10,000 units of the same part to Potter Company for $60 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $100,000 per year.Potter Company should ________.
A) make the part to save $10,000
B) make the part to save $25,000
C) buy the part and rent the facilities to save $10,000
D) buy the part and rent the facilities to save $25,000

Question

Quizplus · Accepted Answer

Buying the part at $60 per unit for 10,000 units costs $600,000. Making the part costs $51 per unit (excluding fixed costs) for 10,000 units, totaling $510,000. The fixed costs are unavoidable, but renting out the facilities adds $100,000 income, effectively saving $10,000 compared to making the part.

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