Question

TB MC Qu. 13-126 (Static) ABC Industries is a multi-product company that currently manufactures... ABC Industries is a multi-product company that currently manufactures 30,000 units of part MR24 each month for use in production of its products. The facilities now being used to produce part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit. If ABC industries is able to obtain part MR24 from an outside supplier at a purchase price of $10 per unit, the monthly financial advantage (disadvantage) of buying the part rather than making it would be:

Answer 1

The monthly financial advantage of buying the part rather than making it would be $120,000.

Step-by-step explanation:

Analyze the Total incremental costs for each alternative. Incremental costs are relevant costs that will only change as a result of the decision taken.

Take note, I have removed the common 40% fixed costs in my calculation as this is not relevant and remains regardless of which decision is taken.

Incremental Costs of Making 30,000 units of part MR24

Fixed Costs ($150,000 x 60 %) $90,000

Variable Costs ($11 x 30,000 units) $330,000

Total $420,000

Incremental Costs of Buying 30,000 units of part MR24

Purchase Price ($10 x x 30,000 units) $300,000

Total $300,000

Decision

The monthly financial advantage of buying the part rather than making it would be $120,000 ($420,000 - $300,000).