Question

Manson Industries incurs unit costs of $7 ($4 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 17,000 of the assembly part at $5 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

See preparation below

Step-by-step explanation:

Particulars Make Buy

Net income increases or decreases

Variable manufacturing

(17,000 × $4) $68,000. $68,000

Fixed manufacturing

(17,000 × $3) $51,000 $51,000

No effect

Purchase price

(17,000 × $5). - $85,000

- $85,000

Total annual cost $119,000 $136,000

-$17,000

From the above, the total annual cost is less in making decision when compared to buy decision so Manson should make the part.