Sparrow Co

question 166

Multiple Choice

Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $0.60 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

• A) $12,000 decrease
• B) $4,000 increase
• C) $20,000 decrease
• D) $1,600 increase

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Definitions:

Proportional Consolidation Method

An accounting method used when a parent company jointly controls a business entity, consolidating only their proportionate share of the entities' assets, liabilities, and operations.

Consistent

refers to the uniform application of accounting policies and procedures in financial reporting across periods.

Entity Concept

An accounting principle that treats a company as a separate legal and accounting entity distinct from its owners or other companies.

Full Consolidation

An accounting method where the parent company integrates the financial statements of all its subsidiaries, regardless of the percentage of ownership, into one consolidated set of financial statements.