Bull Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Unavoidable

question 39

Multiple Choice

Bull Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: $\begin{array}{ll}\text { Direct materials } & \$ 3 \\\text { Direct labor } & 5 \\\text { Variable factory overhead } & 4 \\\text { Fixed factory overhead } & \underline{2} \\\text { Total costs } & \underline{\$ 14} \\\end{array}$ The fixed factory overhead costs are unavoidable. Assume that Bull Company has been offered 5,000 units of the part from another producer for $14 each. The facilities currently used could be used to make 5,000 units of a product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred. Bull Company should:

• A) continue to make the part to earn an extra $3 per unit contribution to profit
• B) make the new product and buy the part to earn an extra $1 per unit contribution to profit
• C) make the new product and buy the part to earn an extra $3 per unit contribution to profit
• D) continue to make the part to earn an extra $1 per unit contribution to profit

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Definitions:

Apples

A type of fruit that is grown worldwide and comes in various colors and flavors, often eaten raw or used in dishes.

Bananas

Fruits that can be eaten, grown on large flowering herb plants from the Musa genus.

Utility Function

A mathematical representation describing how a consumer ranks different bundles of goods based on the level of satisfaction each bundle provides.

Budget Constraint

Describes the combinations of goods and services that a consumer can purchase given their income and the prices of the goods.