Question

Cullumber Industries incurs unit costs of $8 ($5 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 12,400 of the assembly part at $6 per unit. If the offer is accepted, Cullumber will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Cullumber 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).)

Answer 1

Answer:

Buying externally would cost the company additional cost of $12,400

Explanation:

Under the present arrangement it would cost Cullumber $99,200($8*12,400) to produce 12,400 yards internally.

However,the acceptance of the supplier offer would cost $ 111,600   ($6+$3)*12,400)) which is higher than the cost under the present internal production arrangement.

 

                                                     Make                      Buy         difference

Variable cost($5*12,400)            $62000                    -              ($62,000)

Fixed cost ($3*12400)                 $37,200               $37,200        -

Purchase price($6*12400)            -                           $74,400     $74,400

Total                                             $99,200                $111,600     $12,400

The company should continue to produce in-house since it is cheaper.