Goldwater Company Manufactures a Part for Its Production Cycle

question 71

Multiple Choice

Goldwater Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Olson Company has offered to sell 10,000 units of the same part to Goldwater Company for $60 per unit.The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit.No additional fixed costs would be incurred with the new product.Goldwater Company should ________.

• A)make the part to save $10,000
• B)make the part to save $90,000
• C)make the new product and buy the part to save $90,000
• D)make the new product and buy the part to save $110,000

---

Definitions:

Retention Ratio

The proportion of a company's net income that is retained rather than paid out as dividends, indicating reinvestment back into the company.

Return on Assets

A financial ratio that indicates how profitable a company is relative to its total assets.

Internal Growth Rate

The maximum rate at which a company can expand using only internal financing without resorting to borrowing or selling equity.

Dividend Payout Ratio

The fraction of earnings a company pays out to its shareholders as dividends, represented as a percentage of its net income.