Fornelli, Inc If Fornelli, Inc

question 67

Multiple Choice

Fornelli, Inc.can produce 100 units of a component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 15,000 \\\text { Direct Labor } & 6,500 \\\text { Variable Overhead } & 16,000 \\\text { Fixed Overhead } & 11,000\end{array}$$ If Fornelli, Inc.can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

• A)Make and save $500
• B)Buy and save $500
• C)Make and save $2,500
• D)Buy and save $6,500

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Definitions:

Fair Market Value

An estimate of the price at which an asset would change hands between a willing buyer and seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Cost

The amount of money or resources expended in order to obtain an item or service.

Monetary Unit Assumption

An accounting principle that assumes transactions and events can be represented in monetary units or currency.

Economic Entity Assumption

An accounting principle that treats a company as a separate entity from its owners for financial reporting purposes.