25 May Question 41. Sharp Company produces 8,000 parts each year, which ar
Question
41. Sharp Company produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows:
| Variable production costs…….. | $16 | |
| Fixed production costs………… | 20 | |
| Unit product cost………………… | $36 |
The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. If the parts are purchased from the outside supplier, the annual impact on the company’s operating income will be:
A) $24,000 increase
B) $24,000 decrease
C) $56,000 increase
D) $56,000 decrease
42. Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year:
| Direct materials…………………………………… | $ 20,000 | |
| Direct labor………………………………………… | 55,000 | |
| Variable manufacturing overhead………….. | 45,000 | |
| Fixed manufacturing overhead……………… | 70,000 | |
| Total manufacturing cost……………………… | $190,000 |
Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company’s offer, and why?
A) No, because it would be $5,000 cheaper to make the part.
B) Yes, because it would be $10,000 cheaper to buy the part.
C) No, because it would be $15,000 cheaper to make the part.
D) Yes, because it would be $25,000 cheaper to buy the part.
43. Kingston Company needs 10,000 units of a certain part to be used in its production cycle. The following information is available concerning Kingston’s unit product cost:
| Direct materials…………………………………… | $ 6 | |
| Direct labor………………………………………… | 24 | |
| Variable manufacturing overhead………….. | 12 | |
| Fixed manufacturing overhead……………… | 15 | |
| Unit product cost………………………………… | $57 |
Utica Company has offered to supply Kingston’s entire annual requirements of the part for $53 each. If Kingston buys the part from Utica instead of making it, Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue. In deciding whether to make or buy the part, the total relevant costs to make the part internally are:
A) $342,000
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