Question
Motor Company manufactures 10,000 units of Part M1 for use in its production annually. The following costs are reported: Direct Materials: $20,000 Direct Labor: $55,000
Motor Company manufactures 10,000 units of Part M1 for use in its production annually. The following costs are reported:
Direct Materials: $20,000
Direct Labor: $55,000
Variable Overhead: $45,000
Fixed Overhead $70,000
Total $190,000
Valve Company has offered to sell Motor 10,000 units of Part M1 for $18 per unit. If Motor chooses to accept the offer and buy the units from Valve Company, some of the facilities presently used by Motor Company to manufacture Part M1 could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M1 would be totally eliminated. Should Motor accept Valve's offer, and why?
A. No, because it is $5,000 cheaper to make the part.
B. No, because it is $20,000 cheaper to make the part.
C. Yes, because it would be $25,000 cheaper to buy the part.
D. Yes, because it would be $10,000 cheaper to buy the part.
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