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 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.

2. 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

Use the information below to answer the following question(s):

Cruise 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 6,000 units, are as follows:

Direct materials	$4.00
Direct labour	$4.00
Variable manufacturing overhead	$3.00
Fixed manufacturing overhead	$4.00
Total cost	$15.00
The fixed overhead costs are unavoidable.

3. Assuming Cruise Company can purchase 6,000 units of the part from Suri 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 Cruise Company do?
   1. Make the part and save $6.00 per unit.
   2. Make the part and save $2.00 per unit.
   3. Buy the part and save $2.00 per unit.
   4. Buy the part and save $4.00 per unit.

4. Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $13.00 each, and the facilities currently used to make the part could be used to manufacture 6,000 units of another product that would have an $7 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do?
   1. Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.
   2. Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit.
   3. Continue to make the part to earn an extra $2.00 per unit contribution to profit.
   4. Continue to make the part to earn an extra $5.00 per unit contribution to profit.

Answer 1

Answer 1.

Correct option is

a. Make the part and save $1 per unit.

Save = outside buyer price - making the part price = 11 - [2+4+4] = $1

Answer 2.

Correct option is  a. $10

highest price per unit that Spahr Company should be willing to pay for the part = relevant cost = 2 + 4 + 4 = $10

Answer 3.

Correct option is

c. Buy the part and save $2.00 per unit.

outside buyer price = 13 - [ 24000 /6000] = $9

making the part price = 4+ 4 + 3 = 11

Save = 11 - 9 = $2

Answer 4.

Correct option is

a Make the new product and buy the part to earn an extra $5.00 per unit contribution to profit.

outside buyer price = 13

making the part price = 4+ 4 + 3 + 7= 18

Save = 18 - 13 = $5