Question
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows:
Cost
Per Unit
Total
Variable manufacturing cost
$12
$240,000
Supervisor salary
$3
$60,000
Depreciation
$1
$20,000
Allocated fixed overhead
$7
$140,000
If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should Blank______.
Multiple choice question.
continue to make the part — $60,000 advantage
continue to make the part — $40,000 advantage
buy the part — $80,000 advantage
buy the part — $100,000 advantage
Cost
Per Unit
Total
Variable manufacturing cost
$12
$240,000
Supervisor salary
$3
$60,000
Depreciation
$1
$20,000
Allocated fixed overhead
$7
$140,000
If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should Blank______.
Multiple choice question.
continue to make the part — $60,000 advantage
continue to make the part — $40,000 advantage
buy the part — $80,000 advantage
buy the part — $100,000 advantage
Answers
GPT-4o mini
To analyze whether Andrews Co. should make or buy Part XYZ, we need to compare the relevant costs of both options.
### Cost Analysis of Making the Part:
1. **Variable Manufacturing Cost per unit**: $12
- Total for 20,000 units = $12 × 20,000 = $240,000
2. **Supervisor Salary**: $3 per unit
- This cost can be avoided if they elect to buy, therefore, it should be included in the relevant costs.
- Total for 20,000 units = $3 × 20,000 = $60,000
3. **Depreciation**: $1 per unit
- This is a sunk cost and will remain regardless of the decision, thus it is not relevant.
4. **Allocated Fixed Overhead**: $7 per unit
- This is also a sunk cost and remains unaffected by the decision, thus it is not relevant.
### Total Relevant Costs of Making the Part:
- Variable Cost + Supervisor Salary = $240,000 + $60,000 = $300,000
### Cost Analysis of Buying the Part:
- The cost to purchase 20,000 units from the supplier is:
- Purchase Price per unit = $18
- Total Cost = $18 × 20,000 = $360,000
### Decision Comparison:
1. **Cost of Making the Part**: $300,000
2. **Cost of Buying the Part**: $360,000
### Net Advantage/Disadvantage:
- If they **make the part**: $300,000
- If they **buy the part**: $360,000
Calculating the advantage:
- Buying the part costs $360,000 - $300,000 = $60,000 more than making the part, leading to a **$60,000 disadvantage** of buying.
Thus, the correct decision is for Andrews Co. to **continue to make the part — $60,000 advantage**.
So, the correct answer is: **continue to make the part — $60,000 advantage**.
### Cost Analysis of Making the Part:
1. **Variable Manufacturing Cost per unit**: $12
- Total for 20,000 units = $12 × 20,000 = $240,000
2. **Supervisor Salary**: $3 per unit
- This cost can be avoided if they elect to buy, therefore, it should be included in the relevant costs.
- Total for 20,000 units = $3 × 20,000 = $60,000
3. **Depreciation**: $1 per unit
- This is a sunk cost and will remain regardless of the decision, thus it is not relevant.
4. **Allocated Fixed Overhead**: $7 per unit
- This is also a sunk cost and remains unaffected by the decision, thus it is not relevant.
### Total Relevant Costs of Making the Part:
- Variable Cost + Supervisor Salary = $240,000 + $60,000 = $300,000
### Cost Analysis of Buying the Part:
- The cost to purchase 20,000 units from the supplier is:
- Purchase Price per unit = $18
- Total Cost = $18 × 20,000 = $360,000
### Decision Comparison:
1. **Cost of Making the Part**: $300,000
2. **Cost of Buying the Part**: $360,000
### Net Advantage/Disadvantage:
- If they **make the part**: $300,000
- If they **buy the part**: $360,000
Calculating the advantage:
- Buying the part costs $360,000 - $300,000 = $60,000 more than making the part, leading to a **$60,000 disadvantage** of buying.
Thus, the correct decision is for Andrews Co. to **continue to make the part — $60,000 advantage**.
So, the correct answer is: **continue to make the part — $60,000 advantage**.