Question

Martinez Industries incurs unit costs of $7 ($4 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 19,400 of the assembly part at $6 per unit. If the offer is accepted, Martinez will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Martinez will realize by buying the part. (If amount decreases net income then enter the amount using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Net Income Increase (Decrease) Make Buy Variable manufacturing costs Fixed manufacturing costs Purchase price Total annual cost The decision should be to make the part.

Answer 1

Differential analysis

	Make	Buy	Net income increase (decrease)
Variable manufacturing cost	77600		77600
Fixed manufacturing cost	58200	58200
Purchase price		116400	-116400
Total annual Cost	135800	174600	-38800

The decision should be to make the part