Question

Kando Company incurs a $10.00 per unit cost for Product A, which it currently manufactures and sells for $13.50 per unit. Instead of manufacturing and selling this product, the company can purchase it for $5.00 per unit and sell it for $11.90 per unit. If it does so, unit sales would remain unchanged and $5.00 of the $10.00 per unit costs of Product A would be eliminated. 1. Prepare Incremental cost analysis. Should the company continue to manufacture Product A or purchase it for resale

Answer 1

Results are below.

Step-by-step explanation:

Giving the following information:

Make in-house:

Selling price= $13.5

Unitary variable cost= $10

Purchase:

Selling price= $11.9

Purchase price= $5

Unitary variable cost= $5

To determine which option is best, we need to determine the unitary contribution margin. The option that provides the higher unitary contribution margin, is the better choice.

Unitary contribution margin= selling price - unitary variable cost

Make in-house:

Unitary contribution margin= 13.5 - 10

Unitary contribution margin= $3.5

Buy:

Unitary contribution margin= 11.9 - 5 - 5

Unitary contribution margin= $1.9

It is more profitable to make in-house.