During 2019, it cost Westa, Inc. $18 per unit to produce part T5. During 2020, it has increased to $21 per unit. In 2017, Southside Company has offered to provide Part T5 for $16 per unit to Westa. As it pertains to the make-or-buy decision, which statement is true?
A) Differential costs are $5 per unit.
B) Incremental costs are $2 per unit.
C) Net relevant costs are $2 per unit.
D) Incremental revenues are $3 per unit.

Question

Quizplus · Accepted Answer

The differential costs are the difference between the cost to produce in-house and the cost to purchase from an outside supplier. In this case, the cost to produce in-house has increased from $18 per unit to $21 per unit, while the cost to buy from Southside Company is $16 per unit. Therefore, the differential cost is $21 - $16 = $5 per unit. The other three options are not relevant to the make-or-buy decision.

During 2019, It Cost Westa, Inc