Suri Company has offered to sell 6 comma 300 units of the same part to Cruise Company for $ 14.40 per unit. Assuming the company has no other use for its facilities, what should Cruise Company do?

Complete Question:

Cruise Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 6,000 units, are as follows:

Direct materials$4.00

Direct labor$4.00

Variable manufacturing overhead$3.00

Fixed manufacturing overhead$1.00

Total cost$12.00

The fixed overhead costs are unavoidable.

Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $14 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do?

A) Make the part and save $6.00 per unit.

B) Make the part and save $2.00 per unit.

C) Buy the part and save $2.00 per unit.

D) Buy the part and save $1.00 per unit.

Answer:

Option (B) Buy the part and save $1.00 per unit

Explanation:

The cost benefit analysis is as under:

Option 1

Costs and savings associated with not renting out the factory and making sales of 6000 units of the part:

Total Variable Cost (4+4+3) $11 * 6000 = ($66000)

The Revenue earned = 6000 * 14 = $84000

Net Savings $18000

Option 2

Costs and revenues arising due to renting out of factory and not selling the 6000 units of the product part is

Revenue from renting Out $24000

lost of Contribution $3 * 6000 ($18000)

Net Savings $6000

Decision:

As the savings from option 1 are higher so the company must not rent out the factory and can save $2 ($18000 savings / 6000 units) by making the product in home.