Miguel Company manufactures a part for its production cycle. The annual costs pe
ID: 2509193 • Letter: M
Question
Miguel Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 3.00
Total costs $15.00
The fixed factory overhead costs are unavoidable. Jimenez Company has offered to sell 5,000 units of the same part to Miguel Company for $15 per unit. The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Miguel Company should ________.
A) make the part to save $5,000
B) make the part to save $10,000
C) make the new product and buy the part to save $5,000
D) make the new product and buy the part to save $10,000
Explanation / Answer
Relevant cost per unit to make = 3+5+4+5 = $17 Difference in favor of buying=5000*(17-15) = $10000 Option D make the new product and buy the part to save $10,000 is correct