Smith Co, Maker of High-Quality Eyewear, Incurs Fixed Costs of $18

question 70

Multiple Choice

Smith Co., maker of high-quality eyewear, incurs fixed costs of $18 and variable costs of $36 in making one unit of its matrix line of sunglasses, based on current demand of 100,000 units per year. Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $44 each. If Smith accepts the offer of the supplier, it will save $4 per unit in fixed costs. Based solely on this information, what is the recommended decision and how much will be saved based on this decision?

• A) Smith Co. should buy the sunglasses in order to save $200,000.
• B) Smith Co. should buy the sunglasses in order to save $500,000.
• C) Smith Co. should make the sunglasses in order to save $400,000.
• D) Smith Co. should make the sunglasses in order to save $300,000.

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Definitions:

Assembly Costs

Assembly costs are the expenses incurred during the process of putting together components or parts to manufacture a finished product.

Freight Costs

Freight costs are the charges involved in the transportation of goods from one place to another, often resulting from shipping or logistic operations.

Machine

A piece of equipment, generally powered mechanically, electrically, or digitally, used in the manufacturing or productive process.

Equipment Account

An account on the balance sheet that reports the value of equipment a company owns, less any accumulated depreciation.