Final Answer:
Manufacture A:
- Sales: $13.50 per unit
- Costs: $11.00 per unit
- Avoidable costs: $6.00 per unit
- Unavoidable costs: $5.00 per unit ([$11.00 - $6.00] per unit)
- Total costs: $11.00 per unit
Purchase Product B for Resale:
- Sales: $11.30 per unit
- Cost to purchase: $6.00 per unit
- Total costs: $6.00 per unit
The company should purchase Product B for resale rather than manufacturing Product A, as the total cost per unit for Product B is lower compared to the total cost per unit for manufacturing Product A.
Step-by-step explanation:
The incremental cost analysis compares the costs and revenues associated with manufacturing Product A against purchasing and reselling Product B. For manufacturing Product A, the sales price is $13.50 per unit, with a cost of $11.00 per unit. However, $6.00 per unit of these costs can be avoided, leaving $5.00 per unit as unavoidable costs. Thus, the total cost of manufacturing Product A remains at $11.00 per unit.
On the other hand, purchasing Product B for resale incurs a cost of $6.00 per unit but allows sales at $11.30 per unit. In this scenario, the total cost per unit for Product B is $6.00, which is lower than the $11.00 total cost per unit for manufacturing Product A. As a result, opting to purchase Product B for resale would be more beneficial for Kando Company, offering a lower total cost per unit and potentially increasing overall profitability compared to manufacturing Product A.