The Textile Milling Company manufactures an intermediate product identified as Y3. Variable manufacturing costs per unit of Y3 are as follows:
Indigo Company has offered to sell Textile Milling 5,000 units of Y3 for $20 per unit. If Textile Milling accepts the offer, $25,000 of fixed manufacturing overhead will be eliminated.
Applying differential analysis to the situation, Textile Milling should:

Question

The Textile Milling Company manufactures an intermediate product identified as Y3. Variable manufacturing costs per unit of Y3 are as follows:
 Indigo Company has offered to sell Textile Milling 5,000 units of Y3 for $20 per unit. If Textile Milling accepts the offer, $25,000 of fixed manufacturing overhead will be eliminated.
Applying differential analysis to the situation, Textile Milling should:

Quizplus · Accepted Answer

Relevant cost to manufacture = [(2 + 7 + 5) x 5,000] + 25,000) = $95,000.
The cost to purchase is $20 × 5,000 = $100,000.
The savings from making is $100,000 - $95,000 = $5,000.

The Textile Milling Company Manufactures an Intermediate Product Identified as Y3