10.4 Decision Making - Make or Buy Flashcards
In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as
A. Factory management costs.
B. General office costs.
C. Avoidable fixed costs.
D. Depreciation costs.
C. Avoidable fixed costs.
The relevant costs in a make-versus-buy decision are those that differ between the two decision choices. These costs include any variable costs plus any avoidable costs. Avoidable fixed costs will not be incurred if the buy decision is selected.
Listed below are a company’s monthly unit costs to manufacture and market a particular product.
Manufacturing costs:
Direct materials $2.00
Direct labor 2.40
Variable indirect 1.60
Fixed indirect 1.00
Marketing costs:
Variable 2.50
Fixed 1.50
The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?
A. $8.50
B. $6.75
C. $7.75
D. $5.25
B. $6.75
The key to this question is, what costs will the company avoid if it buys from the outside supplier? It will no longer incur the $2.00 of direct materials, nor the $2.40 of direct labor, nor the $1.60 of variable overhead, nor $0.75 ($2.50 × 30%) of the variable marketing costs (regardless of whether the company makes or buys, it will still incur 70% of the variable marketing costs). The firm will therefore avoid costs of $6.75 ($2.00 + $2.40 + $1.60 + $0.75). Thus, it will at least break even by paying no more than $6.75.
A manufacturer produces hacksaw blades. Recently, the manufacturer has decided to enhance its product line and offer band blades. Two alternatives are being analyzed: purchase band blades overseas or produce them in-house. If the band blades are made in-house, the manufacturer will not be able to produce hacksaw blades, forgoing a $30,000 profit contribution.
Revenue from sale of band blades $180,000
Outside purchase 170,000
Direct material and labor 100,000
Variable manufacturing overhead 50,000
Avoidable fixed manufacturing overhead 10,000
Calculate the incremental cost of making band blades.
A. $160,000.
B. $150,000.
C. $180,000.
D. $190,000.
D. $190,000.
The incremental cost of making the band blades is $190,000 ($100,000 direct material and labor + $50,000 variable manufacturing overhead - $10,000 avoidable fixed manufacturing overhead + $30,000 forgone profit contribution).
Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.
If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in savings annually. To achieve this goal, the minimum annual rent on the facility must be
A. $40,000
B. $10,000
C. $190,000
D. $70,000
C. $190,000
If Regis purchases the plugs, Regis will still incur fixed costs per unit of $6 [$8 – ($60,000 ÷ 30,000 units)]; however, because these costs are committed (sunk costs), they are not relevant to this decision. Thus, the relevant cost per unit will be $30 ($36 cost – $6 fixed cost per unit). Without regard to rental of idle production capacity, the company will lose $3 per unit ($33 purchase price – $30 relevant cost) by purchasing the plugs. The total annual loss will be $90,000 (30,000 units × $3). Consequently, to achieve the targeted savings, the minimum annual rent must be $190,000 ($90,000 loss from purchasing + $100,000 targeted savings).
Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows.
Direct materials $ 7
Direct labor 12
Variable overhead 5
Fixed overhead 10
Total costs $34
Cool Compartments, Inc., has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments’ offer, two alternatives are available for the ice-maker manufacturing plant: the plant can be idled or it can be retooled to produce water filtration units.
If Refrigerator retools its existing plant, revenues from the sale of water filtration units are estimated at $80,000, with variable costs amounting to 60% of sales. In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated. For Refrigerator Company to determine the most appropriate action to take in this situation, the total relevant costs of make vs. buy, respectively, are
A. $680,000 vs. $440,000.
B. $648,000 vs. $528,000.
C. $600,000 vs. $560,000.
D. $600,000 vs. $528,000.
D. $600,000 vs. $528,000.
Relevant costs are those that vary depending on the option chosen. Thus, $4 per unit of fixed overhead (20,000 units × $4 = $80,000) will be incurred regardless of the option chosen. This amount is irrelevant to the decision. The costs eliminated by buying ice-makers are the relevant costs of making the ice-makers. They equal $24 per unit ($7 + $12 + $5) of variable costs (20,000 units × $24 = $480,000) and $6 per unit of fixed costs (20,000 units × $6 = $120,000), a total of $600,000. If the ice-makers are bought, and the plant is retooled, the contribution margin from the sale of water filters is $32,000 ($80,000 × 40%). Thus, the $560,000 price of ice-makers (20,000 units × $28) is reduced by $32,000, giving relevant costs of buying of $528,000.
A multiproduct company currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of $150,000 and a theoretical capacity to produce 60,000 units per month. If the company were to buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are $11 per unit. Fixed overhead is allocated based on planned production levels. If the company continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than
A. $14.00
B. $13.00
C. $12.50
D. $12.00
A. $14.00
The relevant cost to the company has two components. One is its own variable production cost for Part 730 ($11). The other is that portion of fixed costs that are incurred if production is done in-house ($150,000 x 60% = $90,000); on a per unit basis, this translates into $3 ($90,000 / 30,000 = $3). The total threshold for the outside supplier’s price is therefore $14 ($11 + $3).
In an insourcing vs. outsourcing situation, which of the following qualitative factors is usually considered?
A. Skilled labor.
B. Special technology.
C. All of the answers are correct.
D. Special materials requirements.
C. All of the answers are correct.
Special technology may be available either within or outside the firm that relates to the particular product. The firm may possess necessary skilled labor or the supplier may. Special materials requirements may also affect the decision process because one supplier may have monopolized a key component. Another factor to be considered is that assurance of quality control is often a reason for making rather than buying.
A table manufacturing company has the following cost structure for producing table tops.
Unit Costs
Direct materials: $23.00
Direct labor: 12.00
Variable manufacturing overhead: 10.00
Fixed manufacturing overhead: 17.00
Variable administrative costs: 2.00
Fixed administrative costs: 3.00
Total unit costs: $67.00
Recently, the table manufacturer received an offer from a corporation to supply the table tops to the table manufacturer. The table manufacturer is considering buying the table tops instead of manufacturing them internally. Which one of the following statements is correct?
A. The table manufacturer should accept the offer if it is less than $47.00 and the table manufacturer has excess manufacturing capacity.
B. The table manufacturer should reject the offer if it is $50.00 or more.
C. The table manufacturer should accept the offer if it is $50.00 or more and the table manufacturer has excess manufacturing capacity.
D. The table manufacturer should reject the offer if it is less than $47.00 and the table manufacturer has excess manufacturing capacity.
A. The table manufacturer should accept the offer if it is less than $47.00 and the table manufacturer has excess manufacturing capacity.
The total unit cost includes $20 of fixed costs ($17 + $3) that is not avoidable if the units are purchased. Moreover, the company has excess capacity. The opportunity cost of making the table tops is zero because no production will be displaced. Consequently, the relevant unit cost of making the table tops is the $47 unit variable cost, and the supplier’s price must be less to justify the buy decision.
A company’s approach to an insourcing vs. outsourcing decision
A. Should use activity-based costing.
B. Involves an analysis of avoidable costs.
C. Depends on whether the company is operating at or below normal volume.
D. Should use absorption (full) costing.
B. Involves an analysis of avoidable costs.
Available resources should be used as efficiently as possible before outsourcing. If the total relevant costs of production are less than the cost to buy the item, it should be produced in-house. The relevant costs are those that can be avoided.
A company manufactures components for use in producing one of its finished products. When 12,000 units are produced, the full cost per unit is $35, separated as follows:
Direct materials $5
Direct labor 15
Variable overhead 10
Fixed overhead 5
A supplier has offered to sell 12,000 components to the company for $37 each. If the company accepts the offer, some of the facilities currently being used to manufacture the components can be rented as warehouse space for $40,000. However, $3 of the fixed overhead currently applied to each component would have to be covered by the company’s other products. What is the differential cost to the company of purchasing the components from the supplier?
A. $24,000
B. $8,000
C. $44,000
D. $20,000
D. $20,000
Differential (incremental) cost is the difference in total cost between two decisions. The relevant costs do not include unavoidable costs, such as the $3 of fixed overhead. It would cost the company an additional $20,000 to purchase, rather than manufacture, the components.
Purchase price (12,000 × $37) $444,000
Minus: Rental income (40,000)
Net cost to purchase $404,000
Cost to manufacture (12,000 × $32) (384,000)
Cost differential $20,000
Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows.
Direct materials $7
Direct labor 12
Variable overhead 5
Fixed overhead 10
Total costs $34
Cool Compartments, Inc., has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments’ offer, two alternatives are available for the ice-maker manufacturing plant: the plant can be idled or it can be retooled to produce water filtration units.
If Refrigerator idles its existing plant, fixed overhead amounting to $6 per unit could be eliminated. The total relevant costs associated with the manufacture of ice-makers amount to
A. $480,000
B. $600,000
C. $560,000
D. $680,000
B. $600,000
Relevant costs are those that vary depending on the option chosen. Thus, $4 per unit of fixed overhead (20,000 units × $4 = $80,000) will be incurred regardless of the option chosen. This amount is irrelevant to the decision. The costs eliminated by buying ice-makers are the relevant costs of making the ice-makers. They equal $24 per unit ($7 + $12 + $5) of variable costs (20,000 units × $24 = $480,000) and $6 per unit of fixed costs (20,000 units × $6 = $120,000), a total of $600,000.
A company currently manufactures all component parts used in the manufacture of various hand tools. A handle is used in three different tools. The unit cost budget for 20,000 handles is
Direct material $.60
Direct labor .40
Variable overhead .10
Fixed overhead .20
Total unit cost $1.30
A parts manufacturer has offered to supply 20,000 handles to the company for $1.25 each, delivered. If the company currently has idle capacity that cannot be used, accepting the offer will
A. Decrease the handle unit cost by $.05.
B. Increase the handle unit cost by $.15.
C. Decrease the handle unit cost by $.15.
D. Increase the handle unit cost by $.05.
B. Increase the handle unit cost by $.15.
Because the fixed cost will be incurred whether the company makes or buys the part, the relevant unit cost of making the part is the $1.10 variable cost ($1.30 – $.20 fixed overhead). The existence of idle capacity indicates that the firm has no opportunity cost to be considered in the calculation. Thus, accepting the offer would increase costs by $.15 ($1.25 – $1.10) per unit.
A company accepted a contract to provide 30,000 units of Product A and 20,000 units of Product B. The company’s staff developed the following information with regard to meeting this contract.
Selling price
Product A: $75
Product B: $125
Variable costs
Product A: $30
Product B: $48
Fixed overhead
Total: $1,600,000
Machine hours required
Product A: 3
Product B: 5
Machine hours available
Total: 160,000
Cost if outsourced
Product A: $45
Product B: $60
The operations manager has identified the following alternatives. Which alternative should be recommended to management?
A. Rent additional capacity of 30,000 machine hours, which will increase fixed costs by $150,000.
B. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
C. Make 25,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
D. Make 20,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
B. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
30,000 Units
Sales A: $2,250,000
Sales B: $2,500,000
Total Sales: $4,750,000
Variable Cost A: 900,000
Variable Cost B: 672,000
Purchase of A: 0
Purchase of B: 360,000
Fixed costs: 1,600,000
Total costs: $3,532,000
Net income: $1,218,000
25,000 Units
Sales A: $2,250,000
Sales B: $2,500,000
Total Sales: $4,750,000
Variable Cost A: 750,000
Variable Cost B: 816,000
Purchase of A: 225,000
Purchase of B: 180,000
Fixed costs: 1,600,000
Total costs: $3,571,000
Net income: $1,179,000
20,000 Units
Sales A: $2,250,000
Sales B: $2,500,000
Total Sales: $4,750,000
Variable Cost A: 600,000
Variable Cost B: 960,000
Purchase of A: 450,000
Purchase of B: 0
Fixed costs: 1,600,000
Total costs: $3,610,000
Net income: $1,140,000
Rent Additional Capacity
Sales A: $2,250,000
Sales B: $2,500,000
Total Sales: $4,750,000
Variable Cost A: 900,000
Variable Cost B: 960,000
Purchase of A: 0
Purchase of B: 0
Fixed costs: 1,750,000
Total costs: $3,610,000
Net income: $1,140,000
Thus, making 30,000 units of Product A produces the greatest profit.
A tailor estimates that 60,000 special zippers will be used in the manufacture of men’s jackets during the next year. A zipper supplier has quoted a price of $.60 per zipper. The tailor would prefer to purchase 5,000 units per month, but the supplier is unable to guarantee this delivery schedule. To ensure availability of these zippers, the tailor is considering the purchase of all 60,000 units at the beginning of the year. Assuming the tailor can invest cash at 8%, the tailor’s opportunity cost of purchasing the 60,000 units at the beginning of the year is
A. $36,000
B. $2,640
C. $1,320
D. $1,440
C. $1,320
The cost of 60,000 zippers is $36,000 (60,000 × $.60). The monthly cost is $3,000 (5,000 × $.60). The company would like to purchase the items monthly, so it will invest at least $3,000 in January. Accordingly, the zippers to be used in January will be purchased at the first of the year even if no special purchase is made. Thus, the incremental advance purchase is only $33,000. Because the alternative arrangement involves a constant monthly expenditure of $3,000, the incremental investment declines by that amount each month (for example, January $36,000 – $3,000 = $33,000; February $33,000 – $3,000 = $30,000 . . . ; December $3,000 – $3,000 = $0). The result is that the average incremental investment for the year is $16,500 ($33,000 ÷ 2), and the opportunity cost of purchasing 60,000 units at the beginning of the year is $1,320 ($16,500 × 8%).
Costs relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well as
A. Factory management costs.
B. Property taxes.
C. Avoidable fixed costs.
D. Factory depreciation
C. Avoidable fixed costs.
Relevant costs are anticipated costs that will vary among the choices available. If two courses of action share some costs, those costs are not relevant because they will be incurred regardless of the decision made. Relevant costs include fixed costs that could be avoided if the items were purchased from an outsider.
A company has received an offer from a supplier to produce units that the company currently produces and sells. The unit price quoted by the supplier is higher than the company’s variable production cost per unit but lower than the price at which the company can market the units. Under which circumstance would the company’s profits increase by purchasing units from the supplier?
A. The company has significant sunk costs.
B. Market demand for the product exceeds the company’s capacity.
C. The company’s administrative costs are zero.
D. The company’s fixed overhead would remain the same if the company purchased units from the supplier
B. Market demand for the product exceeds the company’s capacity.
Fixed costs are relevant costs in the absence of idle capacity. Thus, when demand for a product exceeds a company’s capacity to produce a product, fixed costs may be avoided by purchasing the product from a supplier, resulting in a decrease in expenses and an increase in profits.
A manufacturing company is considering a new product for the coming year, which requires the production of an electric motor. The company can purchase the motor from a reliable vendor for $21 per unit, or manufacture it internally. The company has excess capacity to manufacture the 30,000 motors needed in the coming year except for manufacturing space and special machinery. The machinery can be leased for $45,000 annually. The company has finished goods warehouse space that it currently leases for $39,000, which can be converted and used to manufacture the motors. To replace the finished goods warehouse, additional off-site space can be leased at an annual cost of $54,000. The estimated unit costs for manufacturing the motors internally, exclusive of the leasing costs itemized above, are shown below.
Direct material: $8.00
Direct labor: 4.00
Variable manufacturing overhead: 3.00
Allocated fixed manufacturing overhead: 5.00
Should the company make or buy the electric motors, and why?
A. Make, because manufacturing the motors internally would save $96,000.
B. Buy, because purchasing from the outside vendor would save $54,000.
C. Buy, because purchasing from the outside vendor would save $69,000.
D. Make, because manufacturing the motors internally would save $81,000.
D. Make, because manufacturing the motors internally would save $81,000.
When it comes to make-or-buy decisions, the firm should use available resources as efficiently as possible before outsourcing. As with a special order, only the relevant costs should be considered. When excess production capacity exists, fixed costs are irrelevant. For making this product in-house, the relevant production cost per unit is therefore $15 ($8 + $4 + $3). Given a need of 30,000 units, this results in a cost of production of $450,000 ($15 × 30,000 units). Additionally, the company must consider the cost to lease the machinery ($45,000) and the cost to replace the converted warehouse ($54,000). Thus, the total cost to make the product is $549,000 ($450,000 + $45,000 + $54,000). Conversely, for buying the product, the only relevant cost is the $630,000 spent to purchase it ($21 × 30,000 units). Therefore, the company should make the product in-house because that option results in savings of $81,000 ($630,000 – $549,000).
Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.
If Regis Company purchases the plugs but does not rent the unused facility, the company would
A. Lose $6.00 per unit.
B. Save $3.00 per unit.
C. Save $2.00 per unit.
D. Lose $3.00 per unit.
D. Lose $3.00 per unit.
Exclusive of the fixed overhead, the unit cost of making the plugs is $28 ($36 total cost – $8 fixed OH). Purchasing the plugs will avoid $2 per unit of fixed overhead ($60,000 OH applied ÷ 30,000 units). Accordingly, $6 per unit of fixed overhead is unavoidable, and the relevant (avoidable) unit cost of making the plugs is $30 [$36 total cost – ($8 fixed OH – $2 avoidable cost)]. The purchase option therefore results in a $3-per-unit loss ($33 purchase price – $30 relevant cost).
S Corp. produces premium office chairs. Due to a recent change in market share, S must decide whether to make or buy an order of 1,000 chairs. The materials cost of producing a chair is $20 per pound, the cost of direct labor is $40 per direct labor hour, and manufacturing overhead (100% variable) is allocated at a rate of $10 per chair. Fixed costs for the year are $5 per chair, of which 20% are avoidable. Each chair requires 2 pounds of materials and 1 hour of direct labor to complete. Assuming that S has excess capacity, the total cost per chair relevant to the make-or-buy decision is
A. $90
B. $71
C. $91
D. $95
C. $91
Given sufficient available capacity, no opportunity cost exists. Relevant costs are limited to variable costs and avoidable fixed costs. Thus, on a per-unit basis, each chair has a relevant cost of $91 [(2 lbs. of material × $20) + (1 direct labor hour × $40) + $10 variable manufacturing overhead + ($5 fixed costs × 20% avoidable)].
When applying the cost-benefit approach to a make-or-buy decision, the primary criterion is how well management goals will be achieved in relation to costs. Costs include all expected
A. Historical and future costs relative to the courses of action including all qualitative factors that cannot be measured in numerical terms.
B. Variable costs for the courses of action but not expected fixed costs because only the expected variable costs are relevant.
C. Incremental out-of-pocket costs as well as all expected continuing costs that are common to all the alternative courses of action.
D. Future costs that differ among the alternative courses of action plus all qualitative factors that cannot be measured in numerical terms.
D. Future costs that differ among the alternative courses of action plus all qualitative factors that cannot be measured in numerical terms.
The analysis of a make-or-buy decision is based on relevant costs. If costs do not vary with the option chosen, they are irrelevant. Moreover, the decision may be based on nonquantitative factors, for example, the desire to maintain a relationship with a vendor or to assume control over development of a product.
One of the items served at a restaurant is pizza that is prepared and baked in the restaurant’s kitchen. Each pizza requires $3 of ingredients, $2 of labor to prepare the ingredients, $1 of labor to bake the pizza, and $4 of allocated occupancy costs. The restaurant’s supplier has offered to sell the restaurant pre-made pizzas, ready for baking, for $8 each. If the restaurant accepts the supplier’s offer, the existing pizza preparation space will be converted into two additional dining tables that will increase profits by $42,000 per year by selling drinks, side dishes, and desserts. The restaurant expects to sell 15,000 pizzas annually with or without the additional dining tables. Should the restaurant accept the supplier’s offer?
A. Yes, because the restaurant’s profits will increase by $12,000.
B. No, because the restaurant’s profits will decrease by $3,000.
C. Yes, because the restaurant’s profits will increase by $57,000.
D. No, because the restaurant’s profits will decrease by $27,000.
B. No, because the restaurant’s profits will decrease by $3,000.
If the restaurant does not accept the supplier’s offer, it would cost $10 ($3 ingredient costs + $2 labor to prepare the ingredients + $1 labor to bake + $4 occupancy costs) to make each pizza. If the restaurant accepts the supplier’s offer, it would cost the restaurant $13 ($8 cost of pre-made pizza + $1 labor to bake + $4 occupancy cost) to complete each pizza. If the restaurant sells 15,000 pizzas and accepts the offer, there will be an additional expense of $45,000 (15,000 × $3). Additionally, if the offer is accepted, profits will increase by $42,000 due to the newly converted dining tables. Therefore, the overall restaurant profit would decrease by $3,000 ($42,000 – $45,000), and the offer should be declined.
H Corp. produces premium office chairs. Due to a recent change in market share, H must decide whether to make or buy an order of 1,000 chairs. The materials cost of producing a chair is $20 per pound, the cost of direct labor is $40 per direct labor hour, and manufacturing overhead (100% variable) is allocated at a rate of $10 per chair. Fixed costs for the year are $5 per chair, of which 20% are avoidable. Each chair requires 2 pounds of materials and 1 hour of direct labor to complete. Assuming that H has no excess capacity, what are the relevant costs per chair?
A. $90
B. $91
C. $95
D. $71
C. $95
When no available capacity exists, all variable and fixed costs are relevant to the make-or-buy decision. The total relevant costs are therefore $95 per chair [(2 pounds of materials × $20) + (1 direct labor hour × $40) + $10 variable manufacturing overhead + $5 fixed costs].
Stewart Industries has been producing two bearings, components B12 and B18, for use in production.
B12 / B18
Machine hours required per unit: 2.5 / 3.0
Standard cost per unit:
Direct material $2.25 / $3.75
Direct labor 4.00 / 4.50
Manufacturing overhead
Variable (See Note 1) 2.00 / 2.25
Fixed (See Note 2) 3.75 / 4.50
Stewart’s annual requirement for these components is 8,000 units of B12 and 11,000 units of B18. Recently, Stewart’s management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its benefits).
Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.
The net benefit (loss) per machine hour that would result if Stewart accepts the supplier’s offer of $13.50 unit for Component B18 is
A. $.50.
B. $(1.75)
C. Some amount other than those given.
D. $(1.00).
D. $(1.00).
The variable costs of producing B18 total $10.50 ($3.75 + $4.50 + $2.25). Thus, purchasing at $13.50 would result in a loss of $3 per bearing. Given that each bearing requires 3 hours of machine time, the loss is $1 per machine hour.
