Manson Industries incurs unit costs of $7 ($4 variable and $3 fixed) in making a

Question

Manson Industries incurs unit costs of $7 ($4 variable and $3 fixed) in making a subassembly part for its finished product. A supplier offers to make 13,300 of the part at $6.40 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs.

Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part.

Make

Buy

Net Income
Increase
(Decrease)

What should they do?

Make

Buy

Net Income
Increase
(Decrease)

Variable manufacturing costs $ $ $ Fixed manufacturing costs Purchase price     Total annual cost $ $ $

Explanation / Answer

        Analysis showig total cost saving by buying the part :

                
                  Given, Manson industries incur unit cost to make is $7 per unit

         But of which, variable cost of $4 is to be considered because, fixed costs of $3 has no relevance in make or buy decision being sunk cost.

         Whereas supplier offers the product for $6.40 per unit.

        Hence the decision is to make the product since 6.40 > 4.0

                        Particulars                 Make              Buy              Net Income increase/ (Decrease)

    Variable manufacturing costs              53,200           -                            53,200

    Fixed manufacturing costs                  N/A              -         

         Purchase price                           -                   85,120                  (85,120)

.           Annual costs                             53,200         85,120                   ( 31,920)

Note:

         1. Variable costs to make = 13,300*4 = 53,200

          2. Purchase price = 13,300 * 6.40 = 85,120

          3. Fixed cost doesn't change with buy option. Hence not considered.

   

            

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