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Brief Exercise 7-4 Manson Industries incurs unit costs of $6 ($4 variable and $2

ID: 2460252 • Letter: B

Question

Brief Exercise 7-4

Manson Industries incurs unit costs of $6 ($4 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 17,900 of the assembly part at $5 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. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Brief Exercise 7-4

Manson Industries incurs unit costs of $6 ($4 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 17,900 of the assembly part at $5 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. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Explanation / Answer

Particulars

Make

Buy

Net Income Increase( Decrease)

Variable Manufacturing Cost

                         71,600

                                                      71,600

Fixed Manufacturing cost

                         35,800

                      35,800

                                                               -  

Purchase price

                      89,500

                                                   (89,500)

Total Annual Cost

                       107,400

                    125,300

                                                   (17,900)

Make is better as cost is less

Fixed cost not avoidable

Particulars

Make

Buy

Net Income Increase( Decrease)

Variable Manufacturing Cost

                         71,600

                                                      71,600

Fixed Manufacturing cost

                         35,800

                      35,800

                                                               -  

Purchase price

                      89,500

                                                   (89,500)

Total Annual Cost

                       107,400

                    125,300

                                                   (17,900)

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