Sparrow Co

question 46

Multiple Choice

Sparrow Co.is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit.The unit cost for Sparrow Co.to make the part is $9.00,which includes $0.60 of fixed costs.If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity,what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

• A) $12,000 cost decrease
• B) $4,000 cost increase
• C) $20,000 cost decrease
• D) $1,600 cost increase

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Definitions:

Sell

The act of giving something in exchange for money.

Extraction Costs

The expenses associated with the removal of natural resources from the earth, such as mining for minerals or drilling for oil.

Nonrenewable Resource

A natural resource that cannot be replaced once it has been used or is not replenished in a short period of time, such as fossil fuels and minerals.

Removal

The process of moving or eliminating something from a certain place or context.