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

Calculate and apply the payback period method for investment appraisal.

Appreciate the importance of the cost of capital in investment decisions.

Use profitability index to rank investment projects.

Evaluate the financial attractiveness of an investment considering intangible benefits or salvage value.

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Definitions:

Greater Than

A mathematical symbol (>) indicating that one value is larger or more than another value.

Z-scores

Standard scores that indicate how many standard deviations an element is from the mean.

Standard Normal Distribution

The standard normal distribution is a statistical distribution where the mean is 0 and the standard deviation is 1, representing the distribution of z-scores from any normal distribution.

Between

Typically used in the context of comparing variables or conditions that are separate or distinct from one another.