Cruise Company Produces a Part That Is Used in the Manufacture

question 240

Multiple Choice

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6300 units, are as follows: Assume Cruise Company can purchase 6300 units of the part from Suri Company for $14.30 each, and the facilities currently used to make the part could be used to manufacture 6300 units of another product that would have an $9 per unit contribution margin. If no additional fixed costs would be incurred, what should Cruise Company do?

• A)Make the new product and buy the part to earn an extra $6.50 per unit contribution to profit.
• B)Make the new product and buy the part to earn an extra $5.30 per unit contribution to profit.
• C)Continue to make the part to earn an extra $2.10 per unit contribution to profit.
• D)Continue to make the part to earn an extra $4.00 per unit contribution to profit.

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Definitions:

Absorption Costing

A technique in accounting that rolls all manufacturing expenses including direct material costs, direct labor, and every overhead, regardless if fixed or variable, into the overall cost of a product.

Unit Product Cost

The overall expense involved in creating one unit of a product, encompassing direct materials, direct labor, and distributed overhead costs.

Absorption Costing

An accounting method that includes all manufacturing costs (both variable and fixed) in the cost of a product.

Variable Costing

An accounting method that includes only variable costs in product cost calculations and treats fixed costs as period costs.