Gonzalez Company produces a part that is used in the manufacture of one of its products.The annual costs associated with the production of 5,000 units of this part are as follows:
$\begin{array}{ll}
\text { Direct materials } & \$ 100,000 \
\text { Direct labor } & 56,000 \
\text { Variable factory overhead } & 72,000 \
\text { Fixed factory overhead } & \underline{168,000} \
\text { Total costs }&\$396,000
\end{array}$
Of the fixed factory overhead costs,$72,000 are avoidable.Another company has offered to sell 5,000 units of the same part to Gonzalez for $70.00 per unit.The facilities currently used to make the part can be rented out to another manufacturer for $72,000 per year.What should Gonzalez Company do?
A) Make the part to save $22,000.
B) Make the part to save $50,000.
C) Buy the part and rent the facilities to save $22,000.
D) Buy the part and rent the facilities to save $72,000.

Question

Quizplus · Accepted Answer

Buying the part and renting the facilities saves $22,000. This is calculated by comparing the total cost of making the part ($396,000 - $72,000 avoidable fixed costs = $324,000) with the cost of buying the part ($70.00 * 5,000 = $350,000) and adding the rental income ($72,000), resulting in a net cost of $278,000 when buying and renting, compared to $324,000 when making the part.

Gonzalez Company Produces a Part That Is Used in the Manufacture