Pett Company Produces a Part That Is Used in the Manufacture

question 63

Multiple Choice

Pett Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
Of the fixed factory overhead costs, $15,000 is avoidable.
-Assume that Pett can buy 5,000 units of the part from another producer for $21 each. The current facilities could be used to make 5,000 units of a product that has a contribution margin of $5 per unit. Fixed factory overhead costs to produce this new product would be exactly the same as for the currently produced part. Pett should

• A) continue to make the part and earn an extra $10,000 in profit.
• B) buy the part and produce the new product and earn an extra $1 per unit contribution to profit.
• C) continue to make the part and earn an extra $2 per unit contribution to profit.
• D) buy the part and produce the new product and earn an extra $5 per unit contribution to profit.

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Definitions:

Bureaucratic Approach

A method of organization emphasizing a structured hierarchy, strict rules, and a clear division of responsibilities to achieve efficiency.

Scientific Approach

A methodical process used for investigating phenomena, acquiring new knowledge, or correcting and integrating previous knowledge, based on empirical or measurable evidence.

Theory X

A management theory assuming employees are inherently lazy and will avoid work if they can, necessitating control and coercion by managers.

Theory Y

A management concept suggesting that employees are inherently motivated to work and will show high levels of creativity and responsibility if given the chance.