A business is operating at 90% of capacity and is currently purchasing a part us
ID: 2903160 • Letter: A
Question
A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $17.00 per unit. The unit cost for the business to make the part is $21.00, including fixed costs, and $9.00, not including fixed costs. If 31,732 units of the part are normally purchased during the year but could be manufactured using unused capacity, determine the amount of differential cost increase or decrease from making the part rather than purchasing it. Select the correct answer.
Explanation / Answer
Cost incurred by purchasing the part = $17.00 per unit
Unit variable cost for producing =9
Fixed cost = Total cost - var cost = 21-9 =12
31732 units are purchased and these can be produced within the normal capacity.
This implies fixed cost = 31732 12 = 380784
Let us compare the two costs of purchasing and producing:
Thus we see differential cost decreases due to production in the same factor by 253856 dollars.
(This is due to unutilized fixed costs fully)
Hence production brings more profit.
Per unit No of units Var cost Fixed cost Total unit cost TotalFixed cost Total var cost Total Purchase 17 31732 17 380784 539444 920228 Producing 21 31732 9 12 21 380784 285588 666372 Increase in cost by purchasing = 253856Related Questions
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