Sparrow Co. is currently operating at 80% of capacity and is currently purchasin

Question

Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $.60 of fixed costs. If 4,000 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?

$12,000 cost decrease

$4,000 cost increase

$20,000 cost decrease

$1,600 cost increase

$12,000 cost decrease

$4,000 cost increase

$20,000 cost decrease

$1,600 cost increase

Explanation / Answer

Used capacity 80% Unused Capacity 20% Purchase part from outside is costing $8 manufacturing the same which is purchasing from outside $9 - Fixed cost 0.6 Each year Units Manufactured estimation 4000 Cost of per unit excluding fix cost ($9-$.0.6) =$8.4 Purchasing Unit from outside is @ $8 but if co. manufacture it; it will cost $8.4... so $0.4 increase in total 4000 units manufactured is 4000*$0.4 = $1600 increase

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