Question

MC Qu. 12-08 A company produces a single component with v... A company produces a single component with variable and fixed production costs of $5 and $3. An external supplier has offered to sell the component to the company for $9 per unit. Assuming the company has no use for its idle capacity, what would be the effect of discontinuing production and sourcing the components from the supplier instead? Multiple Choice The company will save $1 per unit. The company will lose $4 per unit. The company will save $3 per unit. The company will save $2 per unit.

Answer 1

Answer)

Statement showing additional cost to be incurred on purchase of component

Particulars	Amount Per unit ($)
Purchase price of component quoted by Supplier	9.00
Less: savings in variable manufacturing cost due to discontinuing of production	5.00
Net Additional Cost	4.00

Therefore, the company will lose $ 4.00 per unit (as it will be the additional cost to be incurred) if the company decides to halt in house production of component and decides to purchase from outside manufacturer.

Note: Fixed production cost $ 3.00 per unit has not been considered for making above calculation as it is a sunk cost being unavoidable in nature.