Question

The external purchase price is $35 for a part that can be manufactured internally for $33 per unit; the $33 manufacturing cost includes $5 per-unit allocated fixed overhead cost. What is the per-unit savings to make rather than to buy?

Answer 1

Solution:

As per the information given in the question we have

External purchase price = $ 35

Total Internal Manufacturing cost = $ 33

Internal Fixed allocated Overhead Cost = $ 5

As per Incremental Analysis / Differential Analysis Fixed costs are treated as sunk cost as they will have to be incurred irrespective of the external purchase. Thus fixed costs incurred are excluded from the calculation.

Thus the per-unit savings to make rather than to buy is

= External purchase price – [ Total Internal Manufacturing cost - Internal Fixed allocated Overhead Cost ]

= $ 35 – [ $ 33 - $ 5 ]

= $ 35 - $ 28

= $ 7

Thus the per-unit savings to make rather than to buy is = $ 7