Question

1.40 Gent Designs requires three units of part A for every unit of A1 that it produces. Currently, part A is made by Gent, with these per-unit costs in a month when 3,900 units were produced: Direct materials $4.00 Direct labor Manufacturing overhead 1.20 Total $6.60 Variable manufacturing overhead is applied at $1.00 per unit. The other $0.20 of overhead consists of allocated fixed costs. Gent will need 6,100 units of part A for the next year's production. Cory Corporation has offered to supply 6,100 units of part A at a price of $6.80 per unit. If Gent accepts the offer, all of the variable costs and $780 of the fixed costs will be avoided. A. Calculate the differential cost? Cost to buy Cost to make Differential cost B. Should Gent Designs accept the offer from Cory Corporation? Gent Designs should not accept the offer. Feedback Check My Work

Answer 1

A.
Cost to Buy	$       41,480
Cost to make	$       39,820
Differential cost	$         1,660
Cost to Buy
Particulars	Amount
Purchase price :	$       41,480	(6100*$6.8)
Unavoidable fixed cost	$                -
Total costs	$       41,480
Note 1 : Total fixed costs when making product A    =   Allocation rate * Number of units produced
= $0.2 * 3900
= $780
Its is mentioned in the question that when Gent Designs buy product A , $780 fixed costs is avoidable.
So Fixed costs incurred will be zero when they buy product A from Cory corporation.
Costs to make
Particulars	Amount
Direct Materials (6100*$4)	$       24,400
Direct labor (6100*$1.4)	$         8,540
Manufacturing overhead
> Variable   (6100*$1)	$         6,100
> Fixed   (see above note 1)	$             780
Total costs	$       39,820
B. They should not accept the offer. Because costs of making the product is $ 1660 low compared to buying
from outside .