Frank Co is currently operating at 80 of capacity and is cur

Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs.

If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?

Solution

Purchase price of the part= $25

Unit cost to make the part =$30

Fixed cost= $3. All fixed cost are common and would not change with either option.

If 20,000 units of the part are normally purchased each year then amount of differential cost will be increased for making the part rather than purchasing it:

(($25-(30-3))*20,000)= $40,000 increased cost