Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and compute the savings assuming fixed costs are unaffected by the decision.

Question

Quizplus · Accepted Answer

The total cost of manufacturing the component is $40 (variable) + $15 (fixed) = $55 per unit. Purchasing the component at $45 saves $10 per unit compared to manufacturing it in-house. However, since fixed costs are unaffected by the decision, the relevant comparison is between the variable cost of manufacturing ($40) and the purchase price ($45). Manufacturing saves $5 per unit compared to purchasing.

Rowan Quinn Company Manufactures Kitchen Appliances