Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36 including fixed costs and $26 excluding fixed costs. If 15,000 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) $30,000 cost decrease
B) $180,000 cost increase
C) $30,000 cost increase
D) $180,000 cost decrease

Question

Quizplus · Accepted Answer

To calculate the differential cost, we need to compare the cost of making the part with the cost of purchasing it.

Cost of making the part:
Variable cost per unit = $26
Fixed cost per unit = ($36 - $26) = $10
Total cost of making the part = Variable cost + (Fixed cost/unit x Units) = $26 + ($10 x 15,000) = $176,000

Cost of purchasing the part:
Cost per unit = $24
Total cost of purchasing the part = Cost per unit x Units = $24 x 15,000 = $360,000

Therefore, the differential cost of making the part instead of purchasing it would be:

Differential cost = Cost of purchasing - Cost of making = $360,000 - $176,000 = $184,000

Since the question asks for the increase or decrease in cost, we can see that making the part would result in a cost increase of $184,000. However, the question specifically asks for the amount of differential cost, which is $184,000. This matches with choice C, which is the correct answer.