9) Make or Buy Decision: Cutler Company currently buys 30,000 units of a part us

Question

9) Make or Buy Decision: Cutler Company currently buys 30,000 units of a part used to manufacture its product at $76 per unit. The supplier recently informed Cutler Company that a 20 percent increase will take effect next year. Cutler has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): If Cutler purchases the units from the supplier, Cutler can rent out the plant for $40,000 per year. Should Cutler Company buy the part externally or make it internally? Use differential analysis to support your answer. (5Pts.)

Explanation / Answer

1)Cutler can rent out the part internally, because it only the cost of 2,400,000 (32+24+24=80 per unit *30,000)

=$2,400,000

If cutler buy the part externally cost is huge

Currently it cost of $76 but supplier said in future it will increase to 20% =15.2 +$76=$91.20 per unit * 30,000 unit=$2,736,000 -$40,000(income as rent out the plant)

Internally = $2,400,000 (best option) less cost

Externally = $2,696,000

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