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 6,400 units, are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost The fixed overhead costs are unavoidable. $4.30 $4.50 $3.30 $1.50 $13.60 Assume Cruise Company can purchase 6,400 units of the part from Suri Company for $14.20 each, and the facilities currently used to make the part could be used to manufacture 6.400 units of another product that would have an $11.00 per unit contribution margin. If no additional foxed costs would be incurred, what should Cruise Company do? O A. Make the new product and buy the part to earn an extra $8.90 per unit contribution to profit OB. Continue to make the part to earn an extra $2.60 per unit contribution to profit OC. Continue to make the part to earn an extra $1.80 per unit contribution to profit. OD. Make the new product and buy the part to earn an extra $3.20 per unit contribution to profit

Answer 1

Change in Income = Contribution Margin from new product – Extra amount paid for old product

= 6,400*11 – (14.20-4.30-4.50-3.30)*6,400

= $56,960

Or $8.9 per unit

Hence, the answer is A.

Note that fixed costs will be incurred under both the cases and hence, are not relevant