One component of a radio produced by Audio Systems, Inc., is currently being pur

Question

One component of a radio produced by Audio Systems, Inc., is currently being purchased for $225 per 100 parts. Management is studying the possibility of manufacturing that component. Annual production (usage) at Audio is 70,000 units; fixed costs (all of which remain unchanged whether the part is made or purchased) are $38,500; and variable costs are $0.95 per unit for direct materials, $0.55 per unit for direct labor, and $0.60 per unit for variable overhead.

Using incremental analysis, decide whether Audio Systems, Inc., should manufacture the part or continue to purchase it from an outside vendor.

How much would be saved?

Explanation / Answer

amount saved = amount manufactured cost - amount purchasing cost ie 185500-157500 = $28000

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