Brief Exercise 20-4 Manson Industries incurs unit costs of $7 ($5 variable and $

Question

Brief Exercise 20-4 Manson Industries incurs unit costs of $7 ($5 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 19,400 of the assembly part at $6 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).)

Make Buy Net Income
Increase (Decrease) Variable manufacturing costs $

$

$

Fixed manufacturing costs

Purchase price

   Total annual cost $

$

$

Explanation / Answer

Make Buy Net Income Increase (Decrease) Variable manufacturing costs 5 $ 0 $ 5 $ Fixed manufacturing costs 2 2 0 Purchase price 6 -6    Total annual cost 7 $ 8 $ -1 $ Since total annual cost of buying exceeds making it is better to make than buy Increase in income due to making = 1*19400 = 19400 dollars.

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