Gonzalez Company Produces a Part That Is Used in the Manufacture

question 123

Multiple Choice

Gonzalez Company produces a part that is used in the manufacture of one of its products.The annual costs associated with the production of 5,000 units of this part are as follows:
$\begin{array}{ll}\text { Direct materials } & \$ 100,000 \\\text { Direct labor } & 56,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & \underline{168,000} \\\text { Total costs }&\$396,000\end{array}$
Of the fixed factory overhead costs,$72,000 are avoidable.Another company has offered to sell 5,000 units of the same part to Gonzalez for $70.00 per unit.The facilities currently used to make the part can be rented out to another manufacturer for $72,000 per year.What should Gonzalez Company do?

• A) Make the part to save $22,000.
• B) Make the part to save $50,000.
• C) Buy the part and rent the facilities to save $22,000.
• D) Buy the part and rent the facilities to save $72,000.

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Definitions:

Overapplied Manufacturing Overhead

A situation where the estimated manufacturing overhead costs are more than the actual overhead costs incurred.

Underapplied Manufacturing Overhead

The amount by which the actual manufacturing overhead costs exceed the applied manufacturing overhead costs for a period.

Cost of Goods Sold

Direct expenditures involved in producing the merchandise a company sells, covering materials and labor.

Underapplied Manufacturing Overhead

Happens when the budgeted costs for manufacturing overhead are lower than the overhead expenses actually experienced.