Teich Incis Considering Whether to Continue to Make a Component or or to Buy

question 77

Multiple Choice

Teich Inc.is considering whether to continue to make a component or to buy it from an outside supplier.The company uses 15,000 of the components each year.The unit product cost of the component according to the company's absorption cost accounting system is given as follows:
Assume that direct labor is a variable cost.Of the fixed manufacturing overhead,10% is avoidable if the component were bought from the outside supplier;the remainder is not avoidable.In addition,making the component uses 3 minutes on the machine that is the company's current constraint.If the component were bought,time would be freed up for use on another product that requires 6 minutes on this machine and that has a contribution margin of $8.10 per unit.
When deciding whether to make or buy the component,what cost of making the component should be compared to the price of buying the component?

• A)$15.55 per unit
• B)$11.50 per unit
• C)$19.15 per unit
• D)$15.10 per unit

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Definitions:

Sole Proprietor

An individual who owns and operates a business alone, bearing unlimited liability for the business's debts and obligations.

Ease Of Formation

The relative simplicity or complexity involved in establishing a new company or business entity.

Treasury Department

A government's division responsible for managing its finances, including producing currency, collecting taxes, and managing the national debt.

Controller

The executive in charge of the accounting function in most companies. The controller generally reports to the CFO.