Question

Waterways has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.83 per unit. Waterways has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Waterways needs 474,000 of these units each year. If Waterways decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. Waterways uses approximately 500 of these units each year. The cost of the unit is $13.26. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,369, and the cost of producing the units would be $10.00 a unit. Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the small fitting. The company should (buy/Make) the fitting. Incremental cost / (savings) will be ____________$

Answer 1

Answer:

Particulars                           Make              Buy                Incremental cost

Manufacturing cost         $474,000                                     $474,000

Purchase                                                   $393,420           ($393,420)

                                                              (474,000*$0.83)

Fixed Cost                                                 $94,800             ($94,800)

                                                               (474,000*$0.20)

Total relevant cost           $474,000        $488,220         ($14,220)

Conclusion: The company should make the fitting and the incremental savings will be $14,220