Spahr Company Produces a Part That Is Used in the Manufacture

question 139

Multiple Choice

Spahr 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 5,000 units,are as follows:
$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 2.00 \\\hline \text { Direct labor } & \$ 4.00 \\\hline \text { Variable manufacturing overhead } & \$ 3.00 \\\hline \text { Fixed manufacturing overhead } & \$ 1.00 \\\hline \text { Total cost } & \$ 10.00 \\\hline \text { The fixed overhead costs are unavoidable. } & \\\hline\end{array}$
-Erickson Company has offered to sell 5,000 units of the same part to Spahr Company for $11 per unit.Assuming the company has no other use for its facilities,what should Spahr Company do?

• A)Make the part and save $5 per unit.
• B)Make the part and save $2 per unit.
• C)Buy from Erickson and save $1 per unit.
• D)Make the part and save $7 per unit.

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Definitions:

Accumulated Depreciation

The total amount of a tangible asset's cost that has been allocated as depreciation expense since the asset was put into use.

Salvage Value

The calculated residual valuation of an asset at the end of its service life.

Insurance Claim

A formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event.

Trade-In Allowance

The amount credited to the buyer when they exchange an asset towards the purchase of a new asset.