Reference: 09-12
Aholt Company Makes 40,000 Units Per Year of a Part

question 45

Multiple Choice

Reference: 09-12
Aholt Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: $$\begin{array} { | l | c | } \hline \text { Direct materials } & \$ 11.30 \\\hline \text { Direct labour } & 22.70 \\\hline \text { Variable manufacturing overhead } & 1.20 \\\hline \text { Fixed manufacturing overhead } & 24.70 \\\hline \text { Unit product cost } & \underline { \$ 59.90 } \\\hline\end{array}$$ An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the
company's remaining products.
-How much of the unit product cost of $59.90 is relevant in the decision of whether to make or buy the part?

• A)$38.00.
• B)$22.70.
• C)$59.90.
• D)$35.20.

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Definitions:

Cognitive Approaches

Psychological theories focusing on how people process information, think, learn, and remember, influencing behavior and emotional responses.

Biological Models

These are frameworks used to explain behaviors and mental states through biological factors, such as genetic, neurological, and physiological processes.

Correlation Coefficient

A statistical measure that indicates the extent to which two or more variables fluctuate together.

Scientific Approaches

Refers to the methods and strategies used by researchers and scientists to investigate and understand phenomena, usually involving systematic observation, measurement, experiment, and the formulation, testing, and modification of hypotheses.