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 decrease
C) $150,000 cost decrease
D) $120,000 cost increase

Question

Quizplus · Accepted Answer

The differential cost is based on variable costs. Making the part costs $11 per unit in variable costs, compared to purchasing it for $15 per unit. Thus, making the part saves $4 per unit. For 30,000 units, this results in a $120,000 cost decrease (30,000 units x $4 savings per unit).

Sage Company Is Operating at 90% of Capacity and Is