Vintech Manufacturing incurs unit costs of $7 ($5 variable and $2 fixed) in maki

Question

Vintech Manufacturing incurs unit costs of $7 ($5 variable and $2 fixed) in making a subassembly part for its finished product. A supplier offers to make 14,400 of the part at $6.30 per unit. If the offer is accepted, Vintech will save all variable costs but no fixed costs

Prepare an analysis showing the total cost saving, if any, Vintech will realize by buying the part. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)

Make

Buy

Net Income
Increase
(Decrease)

Make

Buy

Net Income
Increase
(Decrease)

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

Explanation / Answer

Variable manufacturing costs 5 x 14400 = 72000

Fixed manufacturing costs 2 x 14400 = 28800

Purchase price 6.30 x 14400 = 90720

The Decision should be make the part

Make Buy Net Income
Increase
(Decrease) Variable manufacturing costs $72000 0 $72000 Fixed manufacturing costs $28800 $28800 0 Purchase price 0 $90720 $ (90720) Total annual cost $100800 $119520 $ (18720)

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