Question

In: Accounting

Spahr Company produces a part that is used in the manufacture of one of its products.

 

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 labour

$4.00

Variable manufacturing overhead

4.00

Fixed manufacturing overhead

$2.00

Total cost

$12.00

The fixed overhead costs are unavoidable.

 

  1. Erickson Company has offered to sell 5,000 units of the same part to Spahr Company for $11 per unit. Assuming the company has no other use for its facilities, what should Spahr Company do?
    1. Make the part and save $1 per unit.
    2. Make the part and save $3 per unit.
    3. Buy from Erickson and save $1 per unit.
    4. Make the part and save $5 per unit.

 

 

 

 

 

  1. Assuming no other use for its facilities, what is the highest price per unit that Spahr Company should be willing to pay for the part?
    1. $10
    2. $8
    3. $12
    4. $6

Solutions

Expert Solution

Option A) Make the part and save $1 per unit

Explanation: Total Purchasing Cost from Erickson Company = $11 per unit

Add: Unavoidable Fixed Costs = $2 per unit

So, TOTAL Purchasing Cost    = $13per unit

Therefore, Purchasing Cost Per unit = $13

Less:     Manufacturing Cost Per unit =   ($12)

Savings from making product = $1

(NOTE : Fixed Cost are unavoidable so even if we plan to purchase from Erickson we will incurr the $2 fixed cost ,Hence in calculating the total purchasing cost we also add the fixed cost which will be incurred at our . )

Option A) $10 . Is correct

Explanation: Highest Price To pay = Direct Materials + Direct Labor + Variable Manufacturing Overhead

= $2 + $4 + $4

= $10.

(NOTE: In calculating the highest price per unit that Saphr company will be willing to pay , we will not add the portion of fixed cost because they are unavoidable and the company will incurr that $2 (fixed cost) whether it produces the product or purchase it from outside.)


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