Question

Frank Co. is currently operating at 80 percent of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it

Answer 1

Answer:

If the company makes the product, income will decrease by $40,000.

Explanation:

Giving the following information:

Purchase price= $25

Production cost:

The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs.

First, we need to calculate the total cost of buying the part:

Total cost= 20,000*25= $500,000

Now, the total cost of production:

We won't take into account the fixed costs, because there is unused capacity.

Total cost= 20,000*27= $540,000

If the company makes the product, income will decrease by $40,000.