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Cost accounting

Edgar Automobile Manufacturing Co [ EAM] produces cars for both American and Japanese car companies.

It currently manufactures the transmission that go into the cars . X Corp [X] has offered to provide the transmissions to EAM for $400 each. EAM produces 5,000 cars per month and has the following costs for the manufacture of transmissions:
Direct materials $150, direct labor $50, variable overhead of $100 and fixed overhead of $150 for a total cost of $450.

If the transmissions are purchased from X Corp, $300,000 of fixed overhead costs per month [ supervisor's salaries, insurance, etc.] could be eliminated. Given that the quality of the X Corp transmissions is equivalent to that of EAM, it should:
a. buy transmissions from X Corp. to save $200,000 per month.
b. make transmissions to save $200,000 over the cost of buying them
c. buy transmissions from X Corp to save $250,000 per month
d. Make transmissions to save $250,000 over the cost of buying them
e. None of the above

Solution Preview

Current total cost structure:

Direct Material: 150 x 5000 = $750,000
Direct Labor: 50 x 5000 = $250,000
Variable Overhead: 100 x 5000 = $500,000
Fixed ...