Sparrow Co

question 42

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 $.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:

Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specific time period.

Stock Price

The current market price at which a share of a company's stock can be bought or sold.

Volatile

Describes an asset, security, or market characterized by rapid and significant price changes over a short period.

Option

A financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at an agreed-upon price within a certain period.