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, the amount of differential cost increase or decrease from making the part rather than purchasing it would be a
A)$150,000 cost increase
B)$120,000 cost decrease
C)$150,000 cost decrease
D)$120,000 cost increase

Question

Quizplus · Accepted Answer

The differential cost is the difference in variable costs between making and buying. Making the part costs $11 per unit in variable costs, while buying costs $15 per unit. The cost decrease is ($15 - $11) * 30,000 = $120,000.

Sage Company Is Operating at 90% of Capacity and Is