Question

A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $14.00 per unit. The unit cost for the business to make the part is $22.00, including fixed costs, and $10.00, not including fixed costs. If 33,168 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.
A. $265,344 cost increase
B. $132,672 cost increase
C. $132,672 cost decrease
D. $464,352 cost decrease

Answer 1

Answer

Option C

Decrease in cost   $132,672

Explanation:

To determine the increase or decrease in  costs associated with making, we will compare the relevant costs of the two options as follows

                                                                         $

Variable cost of making                                10

Variable cost buying                                      14

Savings in  cost per from making                 4

Total cost savings (decrease)    4 × 33,168 = $132,672

Decrease in cost as result of making =$132,672