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 13,500 of the assembly part at $5 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs.

Required:
Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part.

Answer 1

Step-by-step explanation:

Make Buy Net income

Variable manufacturing costs $54,000 $0 $54,000

Fixed manufacturing costs $27,000 $27,000 $0

Purchase price $0 $67,500 -$67,500

Total annual cost $81,000 $94,500 -$13,500

Conclusion: Manson Industries should make the part as making part save cost than buying it.

Workings

Make Buy

Variable manufacturing costs 13500*4 0

Fixed manufacturing costs 13500*2 13500*2

Purchase price 0 13500*5