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

question 54

Multiple Choice

Goldwater Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: $\begin{array}{lc}\text { Direct materials } & \$ 20 \\\text { Direct labor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & \underline{10} \\\text { Total costs } & \$ \underline{161}\end{array}$ The fixed factory overhead costs are unavoidable. Assume that Goldwater Company can buy 10,000 units of the part from another producer for $56 each. The current facilities could be used to make 10,000 units of a product that has a contribution margin of $20 per unit. No additional fixed costs would be incurred. Goldwater Company should:

• A) continue to make the part to earn an extra $5 per unit contribution to profit
• B) make the new product and buy the part to earn an extra $15 per unit contribution to profit
• C) make the new product and buy the part to earn an extra $5 per unit contribution to profit
• D) continue to make the part to earn an extra $15 per unit contribution to profit

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Definitions:

Invisible Hand

A metaphor introduced by Adam Smith to describe the self-regulating nature of the marketplace, where individual self-interests unintentionally benefit society as a whole.

Price Mechanism

The way in which prices rise and fall as a result of changes in demand and supply, guiding the allocation of resources in a market economy.

External Benefit

A benefit from a good or service that is received by someone not directly involved in the transaction or production of that good or service, also known as a positive externality.

Pollution

The introduction of contaminants into the natural environment that cause adverse changes and harm to the ecosystem.