Question

Marigold Industries incurs unit costs of $8 ($5 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 10,300 of the assembly part at $6 per unit. If the offer is accepted, Marigold will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Marigold will realize by buying the part

Answer 1

Answer:

The preparation of an incremental analysis is given below

Explanation:

The preparation of an incremental analysis is shown below:

Particulars                           Make Buy               Net Income - Increase/(Decrease)

Variable Manufacturing Cost

(10,300 × $5)                        $51,500             -                  $51,500

Fixed Manufacturing Cost

(10,300 × $3)                        $30,900    $30,900           -                    

Purchase Price (10,300 × 6)         -      $61,800             $(61,800)

Total Annual Cost               $82,400    $92,700       $(10,300)

By above calculation, we can interpret that the marigold should make the part as it would became cheaper but it also saves the cost of $10,300