Potter Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Unavoidable

question 81

Multiple Choice

Potter Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\\\text { Direct materials } & \$ 20.00 \\\text { Direct labor } & 15.00 \\\text { Variable factory overhead } & 16.00 \\\text { Fixed factory overhead } & \underline{10.00} \\\text { Total costs }&\$61.00\end{array}$
The fixed factory overhead costs are unavoidable.Paulson Company has offered to sell 10,000 units of the same part to Potter Company for $60 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $100,000 per year.Potter Company should ________.

• A) make the part to save $10,000
• B) make the part to save $25,000
• C) buy the part and rent the facilities to save $10,000
• D) buy the part and rent the facilities to save $25,000

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Definitions:

Price Reduction

A decrease in the regular selling price of a product or service, usually to stimulate sales or clear inventory.

Value-Based Pricing

is a strategy under which the sale price of a product or service is determined primarily by the perceived value to the customer rather than by the cost of production.

Preventive Maintenance

Regular and systematic inspection, cleaning, and replacement of worn parts, materials, and systems to prevent unforeseen failures and maximize efficiency.

Useful Life

The estimated period over which an asset is expected to be usable by the entity owning it, for its intended purpose.