QS 23-7 Make or buy LO A1 Kando Company incurs a $9.00 per unit cost for Product

Question

QS 23-7 Make or buy LO A1 Kando Company incurs a $9.00 per unit cost for Product A, which it currently manufactures and sells for $13.50 per unit Instead of manufacturing and selling this product, the company can purchase it for $6.00 per unit and sell It for $11.60 per unit. If it does so, unit sales would remain unchanged and $6.00 of the $9.00 per unit costs of Product A would be elminated. 1. Prepare Incremental cost analysis. Should the company continue to manufacture Product A or purchase it for resale? (Round your answers to 2 declmal places.) Purchase Sales Costs Avoidable costs Unavoldable costs Cost to purchase Total costs The company should:

Explanation / Answer

Note : $6 out of $9 per unit cost of Product A would be eliminated that means $6 is an avoidable cost & $3 is an unavoidable cost.

Explanation : Since the total cost in both the options remain same but due to decrease in selleing price per unit in option when Product A is purchase the compay will suffer a contribution loss of $4.50 - $2.60 = $1.90 per unit. Thus the company should continue to manufacture Product A

Manufacture Product A ($) Purchase ($) Sales 13.50 11.60 Costs: Avoidable costs $6 Unavoidable costs $3 $3 Cost to purchase $6 Total costs $9 $9 Contribution margin $4.50 $2.60 The company should Continue to Manufacture Product A

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