Scott Corporation produces a part for use in the production of one of its products. The per-unit costs associated with the annual production of 1,000 units of this part are as follows: Direct Materials $10.50 Direct labor $24.00 Variable factory overhead $ 5.50 Fixed factory overhead $12.00 Total Costs $52.00 $5,000 of the fixed factory overhead costs associated with the production of this product are common fixed costs. Larson Company has offered to sell 1,000 units of the same part to Scott Corporation for $42 per unit. Scott should:

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facundobuzzetti facundobuzzetti · Answer 1 · 2020-07-16T02:05:18+02:00

Answer:

It is cheaper to buy the part. The company will save $5,000.

Explanation:

Giving the following information:

UNitary production cost:

Direct Materials $10.50

Direct labor $24.00

Variable factory overhead $ 5.50

Total avoidable Fixed factory overhead= (12*1,000) - 5,000= 7,000

Larson Company has offered to sell 1,000 units of the same part to Scott Corporation for $42 per unit.

First, we need to calculate the total cost of making the units:

Total cost= (10.5 + 24 + 5.5)*1,000 + 7,000= $47,000

Now, the total cost of buying them:

Buy= 1,000*42= $42,000

It is cheaper to buy the part. The company will save $5,000.

abiolataiwo2015 abiolataiwo2015 · Answer 2 · 2021-11-18T11:06:16+01:00

Based on the information given Scott should continue to make the part, saving $2.00 per unit.

Relevant costs to manufacture:

Direct materials $10.50

Direct labor $24.00

Variable factory overhead $5.50

Total $40.00/unit

Relevant cost to purchase $42.00/unit

Net cost to purchase ($2.00)

($40.00-$42.00)

Based on the above calculation Scott should continue to make the part, saving $2.00 per unit.

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