Exhibit 22-2 JD Smith Company Is Operating at Less Than

question 74

Multiple Choice

Exhibit 22-2 JD Smith Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. If JD Smith uses a differential-cost analysis in deciding whether to make the part or buy the part, the total differential cost of making the part would be:

• A) $99,000
• B) $114,000
• C) $120,000
• D) $138,000

---

Definitions:

Shutdown Decisions

Decision-making processes within a company regarding when to cease operations temporarily or permanently due to various reasons, such as unprofitability.

Capital

Refers to financial assets or resources that businesses use to fund their operations and growth.

Sunk-cost Fallacy

The misconception of valuing continued investment in a project or decision based on the already incurred costs, irrespective of future benefits.

Fixed Costs

Expenses that do not change with the level of output or sales in the short term, such as rent, salaries, and insurance premiums.