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.

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

$

$

Fixed manufacturing costs

Purchase price

   Total annual cost $

$

$

Explanation / Answer

Therefore, the decision will be to "MAKE" the parts. (Because overall cost in making the parts is lesser than the cost in BUYing the parts.)

Make Buy Net Income Increase/Decrease Variable manufacturing costs $97,000 0 $97,000 Fixed manufacturing costs $38,800 $38,800 0 Purchase price 0 $1,16,400 -$1,16,400 Total annual cost $1,35,800 $1,55,200 -$19,400

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