In the \"Select\" boxes, the options are: Purchase price of the Component or Var

Question

In the "Select" boxes, the options are:

Purchase price of the Component

or Variable Manufacturing Costs?

Lockrite Security Company manufacturers home alarms. Currently it is manufacturing one of its components at a total cost of $45 which includes fixed costs of $15 per unit. An outside provider of this component has offered to sell them the component for $40. Provide a differential analysis of the outside purchase proposal. Differential cost to purchase: Differential cost to manufacture: Cost savings from continuing to make the component

Explanation / Answer

Differencial cost to purchase=$40 per unit

Differencial cost to manufacture=$30[Relevant is only the variable cost]

Cost savings from contuinuing to make the Component=$10

Hence the company should continue to make the Component

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