Question

ando Company incurs a $10.00 per unit cost for Product A, which it currently manufactures and sells for $13.50 per unit. Instead of manufacturing and selling this product, the company can purchase it for $5.00 per unit and sell it for $11.90 per unit. If it does so, unit sales would remain unchanged and $5.00 of the $10.00 per unit costs of Product A would be eliminated. 1. Prepare Incremental cost analysis. Should the company continue to manufacture Product A or purchase it for resale

Answer 1

Answer and Explanation:

The preparation of the Incremental cost analysis is presented below:

Particulars           Product A          Purchase

Sales                    $13.50                $11.90

less: cost      

Avoidable cost       $5

Unavoidable cost   $5                    $5

Purchase cost                                 $5

Net income             $3.50              $1.90

Since the net income is higher in the manfufacture  so the company should continue with manfuacture the product A