Question

Please show work

17. Candy Company paid $150,000 for a machine used to produce chocolate. The annual contribution margin from chocolate sales is $75,000. The machine could be sold for $90,000. The opportunity cost of producing the chocolate is ________.
A) $20,000
B) $60,000
C) $85,000
D) $90,000

19. 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  

Answer 1

17.

• The company paid 150000 is a sunk cost and it had nothing to do with the opportunity cost.
• Now the chocolate sales are generating the company a contribution of 75000 but
• At same, the company can also sell the machine at 90000 which means its a decision between the

75000 contribution and 90000 sale value of the machinery, Hence if we produce the chocolates the opportunity cost is D.) 90000

19. In the given question its clear that the total cost of making the units is 15.

In which the fixed cost i.e., the overheads of 3 per units

= 5000 units *3 = 15000 is compulsory and it is an unavoidable cost even we produce the 5000 units or not.

As the same part of the unit is been supplied by the Jimenez Company @ 15 it is better to buy from the Jimenez and

The same facilities can be used to produce a new product of units of 5000 which contributes 5 towards the fixed cost, and there is no incremental cost incurred for this. Hence this plan will reduce the fixed cost of the company and it provides the company with an additional revenue to the company after setting off the Fixed cost i.e.,

The contribution of new units produced (while purchasing the required units from Jimenez)

= 5000*5= 25000

Out of which the compulsory fixed cost to be incurred even producing the own or buying it from outside is = 5000* 3= 15000

Hence the savings will be = Income - Fixed expenses = 25000- 15000= 10000 savings

The option is D) make the new product and buy the part to save $10,000 .