Question

Brief Exercise 26-4 Manson Industries incurs unit costs of $7 ($5 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 14,700 of the assembly part at $6 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).) Make Buy Net Income Increase (Decrease) Variable manufacturing costs $ $ $ Fixed manufacturing costs Purchase price Total annual cost $ $ $ The decision should be to the part.

Answer 1

differential loss for 14,700

Step-by-step explanation:

`\left[\begin{array}{cccc}&$Make&$Buy&$Differential&\\$Variable Cost&-73,500&-88,200&-14,700&\\$Fixed cost&-29,400&-29,400&0&\\$Total&-102,900&-117,600&-14,700&\\\end{array}\right]`

We multiply the variable copst per unit by the 14,7000 units

then we add the fixed cost for the total cost for the make option

Then, we multiply the 14,700 by 6 for the buy option and add the unavoidable fixed cost.

In this case, it is not convinient to buy the assembly part as it would incour in a differential loss for 14,700