Chapman Company Manufactures Widgets The Manufacturing Overhead Consists of $24000 of Costs That Will

question 165

Multiple Choice

Chapman Company manufactures widgets.Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $125000 for 100000 units.Chapman is currently making these components in its own factory.The following costs are associated with this part of the process when 100000 units are produced: $$\begin{array} { l r } \text { Direct materials } & \$ 46,500 \\\text { Direct labor } & 43,500 \\\text { Manufacturing overhead } & 60,000 \\\text { Total } & \$ 150,000 \\\hline\end{array}$$ The manufacturing overhead consists of $24000 of costs that will be eliminated if the components are no longer produced by Chapman.From Chapman's point of view how much is the incremental cost or savings if the widgets are bought instead of made?

• A)$25000 incremental savings
• B)$11000 incremental cost
• C)$11000 incremental savings
• D)$25000 incremental cost

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Definitions:

Contribution Margin

The difference between the sales revenue of a product and its variable costs, used to cover fixed costs and contribute to profit.

Variable Costing

An accounting method that only assigns variable costs to inventory, treating fixed costs as expenses in the period they are incurred.

Variable Costing

An accounting practice that only factors in variable production expenses (like direct materials, direct labor, and variable manufacturing overhead) into the cost of goods.

Unit Product Cost

The total cost (including materials, labor, and overhead) divided by the number of units produced, representing the cost to produce a single unit of product.