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

question 91

Multiple Choice

Hoover Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: $\begin{array}{ll}\text { Direct materials } & \$ 20 \\\text { Direct labor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & \underline{10} \\\text { Total costs } & \$ 61\end{array}$ The fixed factory overhead costs are unavoidable. Madison Company has offered to sell 10,000 units of the same part to Hoover Company for $55 a unit. Assuming no other use for the facilities, Hoover Company should:

• A) make the part to save $4 per unit
• B) buy from Madison to save $6 per unit
• C) buy from Madison to save $4 per unit
• D) make the part to save $6 per unit

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Definitions:

Disposable Income

The funds set aside by households for spending and saving after income tax subtractions.

APC

Average Propensity to Consume, which refers to the percentage of income that an individual or group spends on consumer goods and services as opposed to saving.

Japan

A country located in East Asia, known for its rich culture, technological advancements, and as the world's third-largest economy by nominal GDP.

Negative APS

Refers to a situation where average propensity to save is below zero, indicating that consumption exceeds income, leading to dissavings.