Question

Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and calculate the savings assuming fixed costs are unaffected by the decision.

Answer 1

Answer:

It is cheaper to make the component in house. It will save $5 per component.

Explanation:

Giving the following information:

Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45.

First, we need to calculate the total unitary cost:

In house:

Total unitary cost= unitary fixed cost + unitary variable cost

Total unitary cost= 15 + 40= $55

Buy:

Total unitary cost= 15 + 45= $60

It is cheaper to make the component in house. It will save $5 per component.