Question 1

A company currently manufactures a component with the following unit costs: Direct Materials $10, Direct Labor $8, Variable Overhead $4, Fixed Overhead $6. Total cost is $28. A supplier offers to sell the component for $25. If the company buys the component, $4 of the fixed overhead can be avoided. What is the financial advantage or disadvantage of buying?

Accepted Answer

Identify relevant costs. Relevant costs to make = Variable Costs + Avoidable Fixed Costs. Compare this sum to the Purchase Price.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Including unavoidable fixed costs in the 'Make' cost; ignoring avoidable fixed costs.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 3

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