Question

A&L, Inc. manufactures ceiling fans. The company currently manufactures various sizes of fan blades. The company...

A&L, Inc. manufactures ceiling fans. The company currently manufactures various sizes of fan blades. The company is operating at 85% capacity. The manufacturing costs for large blades is $85 per unit, which includes fixed costs of $35 and variable costs of $50. A proposal from an outside source to buy large blades for $60 per unit plus a $6 per unit freight cost. The company produces 2,000 large fan blades a year. Should A&L, Inc. make or buy the large fan blades and if so, what would the differential savings per unit be by making the correct decision?

Group of answer choices

Make, $16.00 per unit savings

Buy, $31.00 per unit savings

Buy, $16.00 per unit savings

Make, $31.00 per unit savings

Business   Accounting   
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Homework Answers

Answer #1

In order to consider an offer to be accepted or not, only the relevant cost has to be considered for decision making. The relevant cost will be the additional cost incurred for the acceptance of offer which will not include any fixed cost.

Therefore, the relevant cost in the given scenerio will be Variable Cost

A. Cost of manufacturing one unit of Blade = Variable Cost = $50 per unit

B. Purchase price of one unit of Blade = Purchase price + Freight cost = $60 + $6 = $66 per unit

C. Savings in manufacturing one unit of Blade (B - A) = $66 - $50 = $16 per unit

D. Total Savings for the year = 2,000 blades * $16 per unit = $32,000

Therefore, from the above, the Net Savings in manufacturing the Blade is $16 per unit

Correct answer is Make, $16 per unit savings

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