ExpertHard1 markMultiple Choice
CPA · Question 21 · Area I: Business Analysis
ElectroCorp manufactures a component used in its final product. The cost to manufacture 10,000 units is:<br/>- Direct Materials: $50,000<br/>- Direct Labor: $40,000<br/>- Variable Overhead: $20,000<br/>- Fixed Overhead: $30,000<br/><br/>A supplier offers to sell the component for $12 per unit. If ElectroCorp buys the component, it can avoid all variable costs and $10,000 of the fixed overhead. Additionally, the released facility can be rented out for $5,000. <br/><br/>What is the financial advantage or disadvantage of buying the component?
ElectroCorp manufactures a component used in its final product. The cost to manufacture 10,000 units is:<br/>- Direct Materials: $50,000<br/>- Direct Labor: $40,000<br/>- Variable Overhead: $20,000<br/>- Fixed Overhead: $30,000<br/><br/>A supplier offers to sell the component for $12 per unit. If ElectroCorp buys the component, it can avoid all variable costs and $10,000 of the fixed overhead. Additionally, the released facility can be rented out for $5,000. <br/><br/>What is the financial advantage or disadvantage of buying the component?
Answer options:
A.
$5,000 disadvantage
B.
$5,000 advantage
C.
$15,000 advantage
D.
$10,000 disadvantage
How to approach this question
Identify relevant costs (avoidable costs). Compare Avoidable Costs + Opportunity Cost vs Purchase Price.
Full Answer
B.$5,000 advantage✓ Correct
Relevant Costs to Make (Avoidable): $50,000 (DM) + $40,000 (DL) + $20,000 (VOH) + $10,000 (Fixed) = $120,000.<br/>Opportunity Cost of Making (Rent forgone): $5,000.<br/>Total Cost to Make: $125,000.<br/>Cost to Buy: $120,000.<br/>Advantage to Buy: $125,000 - $120,000 = $5,000.
Common mistakes
Including unavoidable fixed costs; ignoring opportunity cost.
Practice the full CPA BAR Practice Exam 4
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Corp. is analyzing its working capital efficiency. For the current year, Orion reported the...HardQ02A company is analyzing its gross margin variance. The budgeted data for the quarter indicated sal...MediumQ03TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Inter...HardQ04Manufacturing Corp. uses Activity-Based Costing (ABC). The company has identified two cost pools:...MediumQ05During the current month, a company purchased 20,000 pounds of raw material for $42,000. The stan...Medium