Question

The fixed factory overhead costs are unavoidable. Jimenez Company has offered to sell 5,000 units of the same part to Miguel Company for $14 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 $4 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Miguel Company should ________.

Answer 1

Jimenez Company has offered to sell 5,000 units of the same part to Miguel Company for $14 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 $4 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Miguel Company should-make the new product and buy the part to save $10,000.

Explanation:

Given that

jimenez Company has offered to sell 5,000 units for $14 per unit

Also we consider that

Per Unit Direct materials $3.00

Direct labor 5.00

Variable factory overhead 4.00

Fixed factory overhead 3.00

Total costs $15.00

Relevant cost per unit to make = 3+5+4+5 = $17    

Difference in favor of buying=5000*(17-15) = $10000

Miguel Company should-make the new product and buy the part to save $10,000.