How can you apply differential analysis to make pricing deci

How can you apply differential analysis to make pricing decisions? What type of cost information can be included in determining prices? Give examples of the type of costs that can be included.

Solution

(B) MAKE OR BUY DECISION

Cost of producing 19,500 monitors

Cost to purchase 19,500 monitors

Difference costs/(savings) of buying 19,500 monitors

Direct materials

$ 120

$

$

Direct labor

( 67*19500)

Variable factory overhead

- Select your answer -Fixed manufacturing overheadFixed non-manufacturing overheadRedundancy costsCorrect 12 of Item 2

22.05

(57500)

- Select your answer -Outside purchase costsFixed non-manufacturing overheadMonitors in finished goods inventoryCorrect 16 of Item 2

39

-

Total costs

$ 181.06

$ 213

$

Dirct labour cost is a sunk cost since they are permanent.so we prepare statement of comparative cost.

If the company buys then there will be a saving of $67 per unit which is labour cost . Material cost will be incurred if we produce. There is a savings in variable overheads if monitors are purchased. Which is $38 per unit. Fixed manufacturing overhead reduces by $57500 which means a saving of ($57500/19500) or 2.95$ per unit. So total savings comes to

                                $67+$38+$2.95= $107.95

Total cost of production = $289-$107.95

                                                =$181.05

Hence production is a better option than manufacturing.

Annual variable costs of old machine

   Selling price of old machine

Matching lives

Purchase price of new machine

Accumulated depreciation of old machine

Irrelevant

Relevant

            Irrelevant

Relevant

Irrelevant