Question

Manson Industries incurs unit costs of $8 ($5 variable and $3 fixed) in making an assembly part for its finished product. A supplier offers to make 14,000 of the assembly part at $6 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		$enter variable manufacturing costs in dollars		$enter variable manufacturing costs in dollars		$enter variable manufacturing costs in dollars
Fixed manufacturing costs		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars		enter fixed manufacturing costs in dollars
Purchase price		enter the purchase price in dollars		enter the purchase price in dollars		enter the purchase price in dollars
Total annual cost		$enter total annual cost in dollars		$enter total annual cost in dollars		$enter total annual cost in dollars

The decision should be to select between make and buy                                                          makebuy the part.

Answer 1

Solution

	Make	Buy	Net income increase (Decrease)
Variable manufacturing cost	$          70,000		$         70,000
Fixed manufacturing costs	$          42,000	$          42,000	$                   -
Purchase price		$          84,000	$       (84,000)
Total annual cost	$        112,000	$        126,000	$       (14,000)

Decision = Maake.

Its better to make the part.

Alternate solution

	Make	Buy	Net income increase (Decrease)
Variable manufacturing cost	$          70,000		$         70,000
Fixed manufacturing costs			$                   -
Purchase price		$          84,000	$       (84,000)
Total annual cost	$          70,000	$          84,000	$       (14,000)