The cost to produce Part A was $20 per unit in 2019. During 2020, it has...
The cost to produce Part A was $20 per unit in 2019. During 2020, it has increased to $22 per unit. In 2020, Pharoah Company has offered to supply Part A for $15 per unit. For the make-or-buy decision,
| incremental costs are $2 per unit. |
| differential costs are $7 per unit. |
| net relevant costs are $2 per unit. |
| incremental revenues are $7 per unit. |
Oriole Company is considering the following
alternatives:
| Alternative A | Alternative B | |
| Revenues | $38000 | $54000 |
| Variable costs | 22800 | 22800 |
| Fixed costs | 10000 | 16000 |
What is the incremental profit?
| $6000 |
| $10000 |
| $5200 |
| $0 |
Homework Answers
1. Differential costs = $22-$15 = $7 per unit
differential costs are $7 per unit is correct answer.
2. Profit on A = $38000-22800-10000 = $5,200
Profit on B = $54000-22800-16000 = $15,200
Incremental profit = $15200-5200 = $10,000
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