Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $13.00 per unit. The unit cost for the business to make the part is $20.00, including fixed costs, and $11.00, excluding fixed costs. If 32,404 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?$226,828 cost increase$421,252 cost decrease$64,808 cost decrease$64,808 cost increase

Question

Business

Claudia Pittman

1 February, 09:08

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $13.00 per unit. The unit cost for the business to make the part is $20.00, including fixed costs, and $11.00, excluding fixed costs. If 32,404 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?$226,828 cost increase$421,252 cost decrease$64,808 cost decrease$64,808 cost increase

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Answers (1)

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Trevor Joyce · Answer 1

Cost difference = $64,808 cost decrease

Explanation:

Giving the following information:

Purchasing price = $13

Make in-house:

Variable cost per unit = $11

Fixed cost per unit = $9

Production in units = 32,404

To determine whether it is more convenient to make the part in-house or buy it, we need to take into account only the variable cost per unit. We leave out of the decision the fixed costs because they remain constant in both options.

Buy = 32,404*13 = $421,252

Make = 32,404*11 = $356,444

Cost difference = $64,808 decrease