Question

Cullumber Industries incurs unit costs of $7 ($5 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 14,700 of the assembly part at $6 per unit. If the offer is accepted, Cullumber will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Cullumber will realize by buying the part. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Answer and Explanation:

The preparation of the analysis that depicts the total cost saving is presented below:

Particulars                               Make          Buy      Net Income or decrease

Variable

Manufacturing Cost             $73,500           -          $73,500

                                             (14,700 × $5)

Fixed

Manufacturing cost              $29,400      $29,400    -

                                             (14,700 × $2)

Purchase price

(14,700 × $6)                            -                  $88,200     ($88,200)

Total annual cost                 $102,900      $117,600    ($14,700)

Based on the total annual cost the company should make the product as it saves the cost by $14,700