The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014, Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision ________.
A) incremental revenues are $4 per unit
B) incremental costs are $2 per unit
C) net relevant costs are $2 per unit
D) differential costs are $4 per unit

Question

Quizplus · Accepted Answer

Differential costs are the difference in total cost between two alternatives. In this case, the cost to produce Part A increased from $20 to $22, making the differential cost $2. However, the question is about the decision to make or buy. The differential cost in the context of making (at $22 per unit) versus buying (at $18 per unit) is $4 per unit, which is the cost savings per unit by choosing to buy.

The Cost to Produce Part a Was $20 Per Unit