Frank Co. is currently operating at 80% of capacity and is currently purchasing

Question

Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $2 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? A. $60,000 cost decrease B. $100,000 cost increase C. $100,000 cost decrease D. $60,000 cost increase

Explanation / Answer

We would first need to subtract out this .40 from the $6 variable cost. thus leaving us with $5.60 per unit made. This is obviously higher than the $5 it would take to purchase the item, so at this point we already know that thier will be an increase in costs. $5.60 cost to make - $5 cost to purchase = $.60 increase per unit made. .60 X 4000 units = 2400 increase in cost. Answer is number 4 $2400 increase in cost.

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