A business 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 $28, not including 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) $60,000 cost decrease
B) $180,000 cost increase
C) $60,000 cost increase
D) $180,000 cost decrease

Question

Quizplus · Accepted Answer

To find out the differential cost increase or decrease from making the part instead of purchasing it, we need to calculate the total cost of making the part and compare it to the total cost of purchasing it.

Total cost of making the part:
Variable cost per unit = $28
Fixed cost per unit = ($36 - $28) = $8
Total cost per unit = $28 + $8 = $36
Total cost for 15,000 units = 15,000 x $36 = $540,000

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

Therefore, the differential cost increase or decrease from making the part instead of purchasing it would be:

$540,000 - $360,000 = $180,000 cost increase

So the answer is C.

A Business Is Operating at 70% of Capacity and Is