Complete Question:
Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:
Direct materials$4.00
Direct labor$4.00
Variable manufacturing overhead$3.00
Fixed manufacturing overhead$1.00
Total cost$12.00
The fixed overhead costs are unavoidable.
Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $14 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do?
A) Make the part and save $6.00 per unit.
B) Make the part and save $2.00 per unit.
C) Buy the part and save $2.00 per unit.
D) Buy the part and save $1.00 per unit.
Answer:
Option (B) Buy the part and save $1.00 per unit
Explanation:
The cost benefit analysis is as under:
Option 1
Costs and savings associated with not renting out the factory and making sales of 6000 units of the part:
Total Variable Cost (4+4+3) $11 * 6000 = ($66000)
The Revenue earned = 6000 * 14 = <u> $84000</u>
Net Savings $18000
Option 2
Costs and revenues arising due to renting out of factory and not selling the 6000 units of the product part is
Revenue from renting Out $24000
lost of Contribution $3 *6000 <u>($18000)</u>
Net Savings $6000
Decision:
As the savings from option 1 are higher so the company must not rent out the factory and can save $2 ($18000 savings / 6000 units) by making the product in home.
