Question

Spahr 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 5,000 units, are as follows: Direct materials $2.00 Direct labor $4.00 Variable manufacturing overhead $3.00 Fixed manufacturing overhead $1.00 Total cost $10.00 The fixed overhead costs are unavoidable. Assuming Spahr Company can purchase 5,000 units of the part from Sexton Company for $13 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Spahr Company do

Answer 1

Based on the fact that the fixed overhead costs to Spahr Company are unavoidable, the company should make the part and save $4 per unit.

What should the company do?

The fixed overhead costs are unavoidable which means that the total cost of making the product should be net of this amount:

= 10 - 1

= $9

This means that the company incurs $9 per unit produced. If they made it themselves, they would save:

= Cost of buying - Cost of making

= 13 - 9

= $4

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