Question

Smith Co., maker of high-quality eyewear, incurs fixed costs of $21 and variable costs of $42 in making one unit of its matrix line of sunglasses, based on current demand of 100,000 units per year. Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $50 each. If Smith accepts the offer of the supplier, it will save $4 per unit in fixed costs. Based solely on this information, what is the recommended decision and how much will be saved based on this decision?

Answer 1

Answer:

It will be better to keep the production, as the unavoidable cost makes the purchase option a financial disadventage of 400,000

Explanation:

$\left[\begin{array}{cccc}& produce& buy& Differential\\\\ Purchase&&-5,000,000&-5,000,000\\ Avoidable Cost&-4,600,000&&4,600,000\\ Unavoidable Cost&-1,700,000&-1,700,000&0\\ Total Cost&-6300000&-6,700,000&-400,000\\\end{array}\right]$

avoidable cost:

+42 variable cost

+ 4 traceable fixed cost

46 cost per unit

46 x 100,000= 4,600,000

unavoidable fixed cost:

total fixed cost - traceable fixed cost = unavoidable fixed cost

21- 4 = 17

17 x 100,000 = 1,700,000

Once we got the numbers, we calcualte the diference for each line and the total financial result