Bacrometer, Inc., makes part no. 566 on one of its production lines. Each month Bacrometer makes...
Bacrometer, Inc., makes part no. 566 on one of its production lines. Each month Bacrometer makes 6,000 of part no. 566 at a variable cost of $4 per part. Bacrometer has been provided a bid for part no. 566 from another manufacturer that will make the part for $5 per part. Bacrometer knows the production line could be rented to another manufacturer for $8,000 per month. Fixed costs associated with the production line will remain unchanged regardless of the company's decision.
a. Compute the incremental cost to make with the incremental cost to buy. Remember the incremental cost to make includes the opportunity cost of the foregone rent revenue.
b. Should Bacrometer continue to make part no. 566?
Homework Answers
a.
Incremental cost to make = Opportunity cost + Variable cost of making = $8,000 + (6,000 x $4) = $32,000
Incremental cost to buy = Purchase price per unit x Number of units purchased = $5 x 6,000 = $30,000
b.
Bacrometer should not continue to make part no. 566 because the incremental cost to make is greater than the incremental cost to buy.
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