Question

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $18.00 per unit. The unit cost for the business to make the part is $21.00, including fixed costs, and $10.00, excluding fixed costs. If 37,247 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?

a.$297,976 cost decrease

b.$111,741 cost increase

c.$297,976 cost increase

d.$670,446 cost decrease

Answer 1

The amount of differential cost decrease from making the part rather than purchasing

The fixed cots is irrelevant for the decision making purpose, only the variable manufacturing costs will be considered for the decision making

The amount of differential cost decrease = Number of units x (The purchase price per unit – Unit manufacturing cost per unit excluding fixed cost)

= 37,247 units x ($18.00 per unit - $10.00 per unit)

= 37,247 units x $8.00 per unit

= $297,976 Decrease

Hence, the right answer choice will be (a). $297,976 cost decrease