ACCOUNTING
Multiple Choice
Stephans Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:
Direct materials $ 1.00
Direct labor 10.00
Variable overhead 5.00
Fixed overhead 8.00
Total $24.00
Bill Company has contacted Stephans with an offer to sell them 5,000 of the subassemblies for $22.00 each. Stephans will eliminate $25,000 of fixed overhead if it accepts the proposal.
Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?
a. Buy; savings = $20,000
b. Buy; savings = $50,000
c. Make; savings = $60,000
d. Make; savings = $5,000
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