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 calculate the savings assuming fixed costs are unaffected by the decision.
A) $5 savings per unit if manufactured
B) $5 savings per unit if purchased
C) $10 savings per unit if manufactured
D) $15 savings per unit if purchased

Question

Quizplus · Accepted Answer

The total cost of manufacturing the component is $40 (variable cost) + $15 (fixed cost) = $55 per unit. Purchasing the component costs $45 per unit. Therefore, manufacturing the component costs $10 more per unit than purchasing it, leading to a $5 savings per unit if purchased. However, since the question assumes fixed costs are unaffected (meaning they are sunk costs in this decision-making process), the relevant comparison is between the variable cost of manufacturing ($40) and the purchase price ($45). Thus, there is a $5 savings per unit if the component is manufactured instead of purchased.

Rowan Quinn Company Manufactures Kitchen Appliances