Question

Manson Industries incurs unit costs of $8 ($5 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 11,500 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.

Answer 1

Total Annual Cost

Buy $92,000

Make $103,500

Net income -$11,500

The decision should be to MAKE the part

Step-by-step explanation:

Preparation of an analysis showing the total cost saving

MANSON INDUSTRIES

Make Buy Net Income Inc. ( dec.)

Variable Mfg. Costs $57,500 $0 -$57,500

($5*11,500)

Fixed Mfg. costs $34,500 $34,500 0

($3*11,500)

Purchase price $0 $69,000 -$69,000

($6*11,500)

Total Annual Cost $92,000 $103,500 -$11,500

Therefore based on the above analysis The decision should be to MAKE THE PART because it is cheaper or lesser than Buy decision.