Barstock Manufacturing incur costs of $7.50 ($4.50 variable and $3 fixed) in mak

Question

Barstock Manufacturing incur costs of $7.50 ($4.50 variable and $3 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the assembly part for 5.00 per unit. If the order is accepted, Barstock will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Barstock will realize by buying the part. 1) Explain how the analysis is to be performed (10 points) and 2) show all computations required to arrive at the correct answer (20 points)

Explanation / Answer

if the Barstock manufacture

the relevant cost saving = $0.5 per unit

If the Barstock purchase from the offer it will not save any money as the relevant cost to manufacture is $ 4.5 whereas Purchase cost is $5

As Fixed cost will be incurred even in manufacture or not, so Fixed manufacture cost is not relevant cost

So the Barstock Should manufacture instead of purchase as per Relevant Costing Technique

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