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 comma 300 ?units, are as? follows: Direct materials $ 4.50 Direct labor $ 4.50 Variable manufacturing overhead $ 3.20 Fixed manufacturing overhead $ 1.50 Total cost $ 13.70 The fixed overhead costs are unavoidable. Assume Cruise Company can purchase 6 comma 300 units of the part from Suri Company for $ 14.40 ?each, and the facilities currently used to make the part could be used to manufacture 6 comma 300 units of another product that would have an $ 9.00 per unit contribution margin. If no additional fixed costs would be? incurred, what should Cruise Company? do? A. Make the new product and buy the part to earn an extra $ 5.40 per unit contribution to profit. B. Continue to make the part to earn an extra $ 1.70 per unit contribution to profit. C. Continue to make the part to earn an extra $ 4.70 per unit contribution to profit. D. Make the new product and buy the part to earn an extra $ 6.80 per unit contribution to profit.

Answer 1

Financial advantage/ (Disadvantage) of purchasing the component:
Cost of purchasing the component				14.4
Less: Contribution earned from new product				9
Net cost of supplier					-5.4
Cost savings of manufacturing:
Material				4.5
Labour				4.5
Variable OH				3.2	12.2
Net per unit advantage of purchasing the component					6.8	per unit
Answer is D. Make the new product and buy the component to earn extra of $ 6.80 per unit profit.