Question

What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $50 per pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $30 per pound

Answer 1

The monthly operating advantage of purchasing internally is $20

Step-by-step explanation:

Judging from an opportunity perspective,the company pays $50 when he purchases externally and as a result saves $30,in essence the company incurs $20($50-$30) more when it purchases externally.

No doubt that if the situation reverses itself, the company gains $20 if produces and sells internally as against purchasing from external party.

From the foregoing,it is obvious that the monthly operating advantage of purchasing goods internally is a cash saving of $20 per item

Hence, buying internally is more desirable and preferred option