Question

Manson Industries incurs unit costs of $6 ($4 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 15,000 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.

Answer 1

The decision should be to make the part

Step-by-step explanation:

Variable cost of manufacturing = 15000x4 = 60000

Fixed cost of manufacturing = 15000 x 2 = 30000

Purchase cost = 15000x5 = 75000

Total annual cost of making = 60000 + 30000 = $90000

Total annual cost of buying is 30000 + 75000 = $105000

90000 - 105,000 = -15000

This shows that manson's cost savings would decrease by -15000

So instead of buying, it is better to make.