Question

Manson Industries incurs unit costs of $6 ($4 variable and $2 fixed) in making an assembly part for its finished product. A supplier offers to make 17,900 of the assembly part at $5 per unit. If the offer is accepted, Manson will save all variable costs but no fixed costs. Prepare an analysis showing the total cost saving, if any, Manson will realize by buying the part. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Variable manufacturing costs $ Fixed manufacturing costs Purchase price Total annual cost The decision should be to the part.

Answer 1

Make	Buy	Net income
Variable manufacturing costs	$71,600	-	$71,600
Fixed manufacturing costs	$35,800	$35,800	-
Purchase price	-	$89,500	($89,500)
Total annual cost	$1,07,400	$1,25,300	($17,900)

The cost to make is less than the cost to buy.

The decision should be to make the part.