Question

Manson Industries incurs unit costs of $6 ($4 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 13,500 of the assembly part at $5 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs.
Required:
Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part.

Answer 1

Answer:

Explanation:

                                                         Make          Buy           Net income

Variable manufacturing costs      $54,000        $0            $54,000

Fixed manufacturing costs           $27,000      $27,000     $0

Purchase price                              $0                $67,500    -$67,500

Total annual cost                          $81,000      $94,500    -$13,500

Conclusion: Manson Industries should make the part as making part save cost than buying it.

Workings

                                                    Make           Buy

Variable manufacturing costs  13500*4      0

Fixed manufacturing costs       13500*2      13500*2

Purchase price                           0                 13500*5