Reference no: EM132566620

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 6,000 units, are as follows:

Direct materials $4.00

Direct labour $4.00

Variable manufacturing overhead $3.00

Fixed manufacturing overhead $1.00

Total cost $12.00

The fixed overhead costs are unavoidable.

1. Assuming Cruise Company can purchase 6,000 units of the part from Suri Company for $13 each, and the facilities currently used to make the part could be rented out to another manufacturer for $24,000 a year, what should Cruise Company do?

a. Make the part and save $6.00 per unit.

b. Make the part and save $2.00 per unit.

c. Buy the part and save $2.00 per unit.

d. Buy the part and save $6.00 per unit.

2. Assume Cruise Company can purchase 6,000 units of the part from Suri Company for $13.00 each, and the facilities currently used to make the part could be used to manufacture 6,000 units of another product that would have an $8 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 $5.00 per unit contribution to profit.

b. Make the new product and buy the part to earn an extra $6.00 per unit contribution to profit.

c. Continue to make the part to earn an extra $2.00 per unit contribution to profit.

d. Continue to make the part to earn an extra $4.00 per unit contribution to profit.