Question

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $16.00 per unit. The unit cost for the business to make the part is $21.00, including fixed costs, and $12.00, not including fixed costs. If 35,822 units of the part are normally purchased during the year but could be manufactured using unused capacity, the amount of differential cost increase or decrease from making the part rather than purchasing it would be a

Answer 1

Total relevant cost = $143,288

Step-by-step explanation:

In a make-or buy decision , to determine the optimal course of action we compare the purchase cost of the component from the external market to the relevant variable cost of internal production. Where the relevant cost of in-house production is less than the external price, the company should produce internally and vice versa

Differential cost per unit = 16 - 12 = $4

Total relevant cost = $4× 35,822 = $143,288

Total relevant cost = $143,288

Note the fixed cost of $10 per unit is exclude because it is not relevant ; it would be incurred either way