Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20 including fixed costs and $11 excluding fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?
A) $150,000 cost increase
B) $120,000 cost decrease.
C) $150,000 cost increase..
D) $120,000 cost increase,

Question

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20 including fixed costs and $11 excluding fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?
A) $150,000 cost increase
B) $120,000 cost decrease.
C)   $150,000 cost increase..
D) $120,000 cost increase,

Quizplus · Accepted Answer

The cost to purchase 30,000 units is 30,000 x $15 = $450,000. The variable cost to make 30,000 units is 30,000 x $11 = $330,000. Since the company is operating at 90% of capacity and the fixed costs are already being incurred, they are irrelevant in this decision. The differential cost to make the part rather than purchase it is $450,000 - $330,000 = $120,000 cost decrease.

Sage Company Is Operating at 90% of Capacity and Is