Answer:
Total incremental cost of Making = $370,800 and Buying = $378,400.
Decision : The company should continue to manufacture the part instead of buying the part from the outside supplier
Explanation:
<u>Analysis of the Buy or Decision</u>
Buy Make Difference
Costs :
Purchase Price ( $4.30 × 88,000 units) $378,400 $ 0 ($378,400)
Savings :
Variable Costs ($3.10 × 88,000 units ) $0 $272,800 $272,800
Fixed Cost $0 $98,000 $98,000
Total $378,400 $370,800 ($7,600)
<em>Note that, Allocated fixed costs are unavoidable whether the company makes or buys the part thus not relevant for this decision.</em>
Conclusion :
It can be seen that it is quite expensive to buy the part from the outside supplier, so continue making the part internally
