Question

Sunny Enterprises makes a component that is used in the assembly of radios, the company's main product. For the component, the variable costs per unit are $18. Razor Edge Products wants to sell Sunny 10,000 units of the component for $22 per unit. Sunny will be able to avoid $30,000 in fixed overhead costs if it chooses to purchase the component externally. What is the cost or benefit of purchasing the component from Razor Edge?

Select one:

a. $70,000 cost

b. $10,000 cost

c. $40,000 cost

d. $10,000 benefit

Answer 1

Number of units = 10,000

Variable cost per unit = $18

Fixed cost = $30,000

Number of units = 10,000

Outside supplier price per unit = $22

Incremental Analysis
	Cost of Making	Cost of Buying	Increase/Decrease in Income
Variable costs	180,000	0	180,000
Fixed costs	30,000	0	30,000
Outside supplier price	0	220,000	-220,000
Total cost	210,000	220,000	-$10,000

Cost of purchasing the component from Razor Edge = $10,000 Cost

Correct option is b.

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