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 12,400 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. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)"

Answer 1

There is negative saving on total cost when it buys = -$12400

Step-by-step explanation:

Per unit fixed costs = $3

Per unit variable costs = $5

Total cost of an unit = $8

Offer by supplier = 12400 units at $6 per units.

First calculate the amount when it makes:

Variable cost = 12400*5 = 62000

Fixed costs = 12400*3 = 37200

Total cost when it makes = 62000 + 37200 = $99200

First calculate the amount when it buys:

Fixed costs = 12400*3 = 37200

Purchase price = 12400*6 = $74400

Total cost when it buys = 37200 + 74400 = $111600

Since the total cost of buying is greater, so it should make the part.

However, the total cost saving when it makes the part = Total cost when it buys -Total cost when it makes

= $111600-$99200

= $12400

There is negative saving on total cost when it buys = -$12400