Frank Co. is currently operating at 80% of capacity and is currently purchasing

Question

Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? Select one a. $60,000 decrease b. $40,000 decrease c. $40,000 increase d. $60,000 increase

Explanation / Answer

Calculate differencial cost :

Purchase cost = 20000*25 = 500000

Manufacturing cost = (30-3)*20000 = 540000

So answer is c) $40000 Increase

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