Lockrite Security Company manufacturers home alarms. Currently, it is manufactur

Question

Lockrite Security Company manufacturers home alarms. Currently, it is manufacturing one of its components at a total cost of $43 which includes fixed costs of $14 per unit. An outside provider of this component has offered to sell Lockrite the component for $39.
What is the cost savings for continuing to make the component?

Differential cost to purchase:

• Purchase price of the component
• Variable manufacturing costs

$ Differential cost to manufacture:

• Purchase price of the component
• Variable manufacturing costs

$ Cost savings from continuing to make the component $

Explanation / Answer

The cost to manufacture includes fixed costs of $14 which is not relevant as fixed costs are sunk costs as they have already been incurred and cannot be taken back

So, Relevant cost to manufacture

= Total costs – Fixed costs

= $43 - $14

= $29 per unit

Purchase price is $39

So, savings due to manufacturing internally

= Purchase price – Relevant costs

= $39 - $29

= $10 per unit

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.