Question

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15.00 per unit. The unit cost for the business to make the part is $22.00, including fixed costs, and $12.00, excluding fixed costs. If 38,423 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?

Answer 1

$115,269 decrease

Step-by-step explanation:

Below are the following information given in the question.

Purchase price = $15

Variable cost per unit = $12

Fixed cost per unit = $10. i.e $22-$10

Production in units = 38,423

N.B. As in the above scenario, we will need to factor in the variable cost per unit only in order to determine whether it is convenient to make the part in house or purchase it. Also, we will have to ignore fixed costs because of the fact that it is constant in the option of whether to buy or make part in house.

Therefore,

Option at purchasing/Buying

= $38,423 × $15

= $576,345

Option at making the part in house

= $38,423 × $12

= $461,076

Cost difference is therefore = $115,269 decrease