Question

Manson Industries incurs unit costs of $8 ($5 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 10,000 of the assembly part at $6 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Make		Buy		Net Income Increase (Decrease)
Variable manufacturing costs		$enter variable manufacturing costs in dollars		$enter variable manufacturing costs in dollars		$enter variable manufacturing costs in dollars
Fixed manufacturing costs		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars
Purchase price		enter the purchase price in dollars		enter the purchase price in dollars		enter the purchase price in dollars
Total annual cost		$enter total annual cost in dollars		$enter total annual cost in dollars		$enter total annual cost in dollars

The decision should be to select between make and buy

buymake

the part.

Answer 1

Solution:

The company should opt for Make Option as in case of Buy option company will incur an extra cost of $10,000 or there will be a decrease in the Net Income by $10,000.

Explanation:

Particular	Make	Buy	Net Income ( Increase / Decrease)
No Units under consideration	10,000	10,000
Variable cost	5	-
Fixed Cost (refer to note)	-	-
buying Cost	-	6
Total Cost	50,000	60,000	10,000 ( Net Income Dercrese as total cost increase)

Note:

1. The fixed costs here become irrelevant to decide whether to make or buy the product because in both cases this cost will remain the same. ( Question mention in case of buy option only variable cost could be saved that means the fixed cost will continue to incurred by the company.)