Computers makes 5 comma 900 units of a circuit board, CB76 at a cost of $ 290 each. Variable cost per unit is $ 220 and fixed cost per unit is $ 70. Peach Electronics offers to supply 5 comma 900 units of CB76 for $ 270. If Degler buys from Peach it will be able to save $ 25 per unit in fixed costs but continue to incur the remaining $ 45 per unit. Should Degler accept Peach's offer? Explain.

There is a loss on buying from outside supplier, Peach's offer should not be accepted.

Explanation:

Variable cost is a cost that varies with number of units produced or sold so it is always a relevant cost while making decision.

Fixed cost remains constant irrespective of number of units so it is a irrelevant cost unless avoidable. So in the given case, fixed cost $70 is irrelevant since same will be incurred whether purchased or manufactured.

Incremental savings

Saving in variable cost 220

saving in fixed cost 25

Total saving 245

less: Incremental cost (270)

Incremental profit / (loss) on buying from outside supplier (25)

Total loss 25*5900 = - 147500

Therefore, There is a loss on buying from outside supplier, Peach's offer should not be accepted.