A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $12, not including fixed costs. If 30,000 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. $ 90,000 cost decreaseb. $150,000 cost increasec. $150,000 cost increased. $ 90,000 cost increase

Question

Business

Winters

26 February, 07:08

A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $12, not including fixed costs. If 30,000 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. $ 90,000 cost decreaseb. $150,000 cost increasec. $150,000 cost increased. $ 90,000 cost increase

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Answers (1)

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Kadin Lamb · Answer 1

a. $ 90,000 cost decrease

Explanation:

The computation in the change in the amount of differential cost is shown below:

= (Unit cost by ignoring the fixed cost) - (unit cost to manufacturing the purchase cost) * number of units purchased

= ($12 - $15) * 30,000 units

= $3 * 30,000 units

= $90,000 decrease

And the other information which is given in the question is not relevant. Hence, ignored it