Question

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $17.00 per unit. The unit cost for the business to make the part is $22.00, including fixed costs, and $9.00, not including fixed costs. If 37,884 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?

a. $226,828 cost increase
b. $421,252 cost decrease
c. $64,808 cost decrease
d. $64,808 cost increase

Answer 1

$303,072 - The Question is altered by the Students, so the options given are not correct.

Step-by-step explanation:

In relevant cost the only cost relevant is the variable cost not the fixed costs. So differential cost would be the difference of the cost of purchasing and the cost of making the product at home, excludin the fixed cost.

Differential cost = Cost of purchasing Less Cost of making at home

Cost of purchasing one unit is $17 which is variable cost. Likewise the cost of making the part at home is $9 which is also 100% variable cost. So by putting values, we have:

Differential cost = 37,884 Units * $17 - 37,884 Units * $9 = $303,072