Bacrometer, Inc., makes part no. 566 on one of its production lines. Each month
ID: 2400096 • Letter: B
Question
Bacrometer, Inc., makes part no. 566 on one of its production lines. Each month Bacrometer makes 6,000 of part no. 566 at a variable cost of $4 per part. Bacrometer has been provided a bid for part no. 566 from another manufacturer that will make the part for $5 per part. Bacrometer knows the production line could be rented to another manufacturer for $8,000 per month. Fixed costs associated with the production line will remain unchanged regardless of the company's decision.
a. Compute the incremental cost to make with the incremental cost to buy. Remember the incremental cost to make includes the opportunity cost of the foregone rent revenue.
incremental cost to make?
incremental cost to buy?
Explanation / Answer
Incremental cost to make = Cost of manufacuring parts+Opportunity cost of foregone rent revenue
= (6,000 parts*$4 per part)+$8,000
= $24,000+$8,000 = $32,000
Incremental cost to buy = Cost of buying parts
= 6,000 parts*$5 per part = $30,000
As the cost of buying parts from another manufcaturer is less than cost of making parts, the company should buy the parts.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.