Question

Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26, not including fixed costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?

Answer 1

Answer:

$30,000 increase

Explanation:

Piper Corp is operating at 70% capacity, and so we can produce the unit in-house at no increase to fixed cost we are already incurring. So we assume fixed cost for the extra production is zero

Without fixed cost the unit can be produced at $26, so cost of producing the units needed= 26*15,000= $390,000

To buy the product we need $24 per unit, so the cost of buying the needed units is= 24* 15,000= $360,000

The differential cost of making the part rather than purchasing it = Cost of inhouse production- Cost of Buying= 390,000- 360,000= $30,000