Question

McMurphy Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 12,000 units of this part are as follows: Direct materials $86,000 Direct labor 126,000 Variable factory overhead 58,000 Fixed factory overhead 138,000 Total costs 408,000 Of the fixed factory overhead costs, $55,000 is avoidable. Conners Company has offered to sell 12,000 units of the same part to McMurphy Corporation for $41 per unit. Assuming there is no other use for the facilities, Schmidt should ________. Group of answer choices buy the part, as this would save the company $192,000 buy the part, as this would save $16 per unit make the part, as this would save almost $14 per unit make the part, as this would save $16 per unit

Answer 1

make the part, as this would save almost $14 per unit

Step-by-step explanation:

We have to compare the total cost to make against the total cost to buy 12,000 units.

Total Cost to Make

Direct materials $86,000

Direct labor $126,000

Variable factory overhead $58,000

Fixed factory overhead $55,000

Total Cost $325,000

Total Cost to buy

Purchase Price = $41 x 12,000 units = $492,000

Difference

Financial Advantage = Total Cost to buy - Total Cost to Make

= $492,000 - $325,000

= $167,000

Conclusion :

Schmidt should make the part, as this would save almost $14 per unit