Question

Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and calculate the savings assuming fixed costs are unaffected by the decision. a. $5 savings per unit if purchased b. $5 savings per unit if manufactured c. $10 savings per unit if manufactured d. $15 savings per unit if purchased

Answer 1

Answer:

The correct answer would be option B, $5 savings per unit if manufactured.

Explanation:

In the question, it is told that Rowan Quinn company bears two costs to manufacture its kitchen Appliances. One is fixed cost of $15 per unit and a variable cost of $40 per unit. So according to the question, if fixed cost is kept constant, which means there will be no effect of any decision on the fixed cost, and an outside provider of the component offers to sell Rowan Quinn the component at a price of $45, then the saving Rowan Quinn can do is of $5 per unit if manufactured at their own, because they are already operating at a less price than offered by the outside provider. So the savings would be $5 on each unit manufactured by Rowan Quinn.