Question

Emil Manufacturing incurs unit costs of $7.00 ($5.00 variable and $2.00 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the parts for $5.40 per unit. If it accepts the offer, Emil will save all variable costs and $1 of fixed costs.

Prepare an analysis showing the total cost savings, if any, that Emil will realize by buying the part. (Round per unit answers to 2 decimal places, e.g. 15.25. If an amount reduces the net income then enter with a negative sign preceding the number, e.g. -15,000 or parenthesis, e.g. (15,000).)

Answer 1

Answer)

Calculation of Total cost savings if Emil purchases the sub-assembly part from outside supplier

Particulars	Per Unit	Total
Benefit to be achieved
Savings in Variable Cost	$ 5.00	$ 50,000
Savings in Fixed Cost	$ 1.00	$ 10,000
Total (a)	$ 6.00	$ 60,000
Cost to be incurred
Purchase Price	$ 5.40	$ 54,000
Total (b)	$ 5.40	$ 54,000
Total Cost Savings (a) - (b)	$ 0.60	$ 6,000

Conclusion: Thus Emil will have Total cost savings of $ 6,000 on purchase of 10,000 units of sub-assembly from outside supplier.

Working Notes:

Savings in variable cost

Savings in variable cost = Variable cost saved per unit X number of units purchased from outside suppler

Savings in variable cost     = $ 5.00 X 10,000 units

Savings in variable cost     = $ 50,000                              

Savings in Fixed cost

Savings in Fixed cost = Fixed cost saved per unit X number of units purchased from outside suppler

Savings in Fixed cost     = $ 1.00 X 10,000 units

Savings in Fixed cost     = $ 10,000