Question

“A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit.” Do you agree or disagree? Why?

Answer in your own words, ty

Answer 1

No, this is not true, There are two types of Cost while manufacturing a unit, Variable Cost and Fixed Cost.

Variable cost is the cost which changes with the change in production like material cost And;

Fixed Cost is the cost which is fixed in nature and it idoesnot change with the change in the production.

While calculating Total Manufacturing cost per unit, we add both Variable and Fixed cost , Fixed Cost doesnot affect the decision of Buy or Make decision as it will be fixed and doesnot affect our decision.

The real difference is between the Purchase cost and the cost which will be saved if we purchase the unit from outside plus the Opportunity Cost (i.e. the use of free resourses to the best alternative use).