15) The ABC Company manufactures components for use in producing one of its fini

Question

15) The ABC Company manufactures components for use in producing one of its finished products. When 12,000 units are produced, the full cost per unit is $35, separated as follows: Direct materials $ 5 Direct labor 15 Variable overhead 10 Fixed overhead 5 The XYZ Company has offered to sell 12,000 components to ABC for $37 each. If ABC accepts the offer, some of the facilities currently being used to manufacture the components can be rented as warehouse space for $40,000. However, $3 of the fixed overhead currently applied to each component would have to be covered by ABC’s other products. What is the differential cost to the ABC Company of purchasing the components from the XYZ Company?

Explanation / Answer

Cost of making 384000 =12000*(35-3) Add: Opoortunity cost 40000 Total Cost of making 424000 Less Purchase cost 444000 =12000*37 Differential cost 20000 Favors making

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