Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $2 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it

Question

Business

Jared Bradford

3 December, 18:45

Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $2 of fixed costs. If 20,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it

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Kristian Davenport · Answer 1

differential cost increase = $60,000

Explanation:

Frank currently pays $25 per unit x 20,000 units = $500,000

if it can produce the parts itself, the differential cost will be only the variable costs = $30 - $2 (fixed costs) = $28 per unit x 20,000 units = $560,000

It would be a bad decision for Frank to produce the parts because they would spend $60,000 more than if they continue to purchase them from a vendor.