Brief Exercise 7-4 Manson Industries incurs unit costs of $7.61 ($4.14 variable

Question

Brief Exercise 7-4

Manson Industries incurs unit costs of $7.61 ($4.14 variable and $3.47 fixed) in making a subassembly part for its finished product. A supplier offers to make 17,000 of the assembly part at $5.40 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).)

Make Buy Net Income
Increase (Decrease) Variable manufacturing costs $ $ $ Fixed manufacturing costs Purchase price    Total annual cost $ $ $

Explanation / Answer

Make Buy Net Income Increase ( Decrease) Variable Manufacturring Cost 70380 (17000*4.14) 70380 Fixed Manufacturing Cost 58990 (17000*3.47) 58990 0 Purchase Price 91800 (17000*5.4 -91800 ) Total annual Cost 129370 150790 -21420 As the income will decrease by $ 21420 the offer should not be accepted The decision should be to make the part

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