Taylor Manufactures 12,000 Units of a Part Used in Its

question 51

Multiple Choice

Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual production activities related to this part are as follows: Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000
Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor were to accept the offer, some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the part would be totally eliminated.
What should Taylor's decision be, and what is the total cost savings that would result?

• A) Make, $60,000
• B) Buy, $60,000
• C) Make, $78,000
• D) Buy, $78,000

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Definitions:

Coupon Rates

The interest rate on a bond, determining the periodic interest payment to the bondholder.

Market Rates

are the prevailing interest rates or prices for services, securities, or commodities in the open market.

Premium

The amount paid for an insurance policy or the amount by which a bond or stock sells above its face value.

Par

Par value, often referred to simply as "par," is the face value of a bond or the stock value stated in the corporate charter, not necessarily its market value.