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Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $11, not including fixed costs. If 30,000 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. $150,000 cost increase B. $120,000 cost increase C. $120,000 cost decrease D. $150,000 cost increase

Question

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for 15perunit.Theunitcostforthebusinesstomakethepartis15 per unit. The unit cost for the business to make the part is 20, including fixed costs, and 11,notincludingfixedcosts.If30,000unitsofthepartarenormallypurchasedduringtheyearbutcouldbemanufacturedusingunusedcapacity,whatwouldbetheamountofdifferentialcostincreaseordecreasefrommakingthepartratherthanpurchasingit?A.11, not including fixed costs. If 30,000 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. 150,000 cost increase B. 120,000costincreaseC.120,000 cost increase C. 120,000 cost decrease D. $150,000 cost increase

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Solution

To answer this question, we need to calculate the difference in cost between making the part and purchasing it.

First, let's calculate the cost of purchasing the part: The cost of purchasing the part is 15perunit.If30,000unitsarepurchased,thetotalcostwouldbe15 per unit. If 30,000 units are purchased, the total cost would be 15 * 30,000 = $450,000.

Next, let's calculate the cost of making the part: The cost of making the part is 20perunit,includingfixedcosts.However,sincethecompanyisoperatingat9020 per unit, including fixed costs. However, since the company is operating at 90% of capacity, it can use its unused capacity to make the parts. Therefore, we should consider the variable cost of making the part, which is 11 per unit (i.e., 20−20 - 9 fixed costs). If 30,000 units are made, the total cost would be 11∗30,000=11 * 30,000 = 330,000.

Finally, let's calculate the differential cost: The differential cost is the cost of making the part minus the cost of purchasing it, which is 330,000−330,000 - 450,000 = -$120,000.

Therefore, making the part rather than purchasing it would result in a 120,000costdecrease.So,theanswerisC.120,000 cost decrease. So, the answer is C. 120,000 cost decrease.

This problem has been solved

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