Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26, not including fixed costs. If 15,000 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)$30,000 cost decrease
B)$180,000 cost increase
C)$30,000 cost increase
D)$180,000 cost decrease

Question

Quizplus · Accepted Answer

The differential cost increase from making the part rather than purchasing it is calculated by comparing the relevant costs of both options. The cost to purchase the part is $24 per unit, while the variable cost to make the part is $26 per unit (excluding fixed costs, which are not incremental in this decision since they exist regardless of the choice). For 15,000 units, the differential cost is ($26 - $24) * 15,000 = $30,000, representing an increase in costs if the parts are made in-house.