Question

Waterway 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 12,400 of the assembly part at $6 per unit. If the offer is accepted, Waterway will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Waterway 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		$		$		$
Fixed manufacturing costs
Purchase price
Total annual cost		$		$		$

The decision should be to                                                           make/buy the part.

Answer 1

Ans:

Order quantity : 12,400 Units

Variable cost per Unit : $5

Variable costs of make: 12,400 *$5 = $62,000

Fixed Costs : $3 per unit

Total Fixed Costs : 12,400 * $3 = $37,200

Purchase costs : $6

Total Purchase costs : 12,400 * $6 = $74,400

Analysis Table :

	Make	Buy	Net Income Increase /(Decrease)
Variable manufacturing costs	$62,000	$0	$62,000
Fixed Manufacturing Costs	$37,200	$37,200	$0
Purchase Price	$0	$74,400	($74,400)
Total Annual Costs	$99,200	$111,600	($12,400)

So Waterway Industies should continue to make the product.

For any query please ask in comment box, we are happy to help you. Also please don't forget to provide your valuable feedback. Thanks!