Reference no: EM131749166

Question: Motor Company manufactures 10,000 units of Part M-1 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

                         $190,000

Valve Company has offered to sell Motor 10,000 units of Part M-1 for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-1 could be rented to a third party at an annual rental of $10,000. Additionally, $4 per unit of the fixed overhead applied to Part M-1 would be totally eliminated. Should Motor accept Valve's offer, and why?

A) No, because it would be $10,000 cheaper to make the part.

B) Yes, because it would be $10,000 cheaper to buy the part.

C) No, because it would be $15,000 cheaper to make the part.

D) Yes, because it would be $25,000 cheaper to buy the part.