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,what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?
A) $30,000 cost decrease
B) $180,000 cost increase
C) $30,000 cost increase
D) $180,000 cost decrease

Question

Quizplus · Accepted Answer

To find out whether it would be more cost-effective to make or buy the part, we need to calculate the differential cost. The differential cost is the difference between the cost of making the part and the cost of purchasing the part.

Cost of making the part:
Variable costs = $26 per unit
Fixed costs = $10 per unit (i.e. $36 - $26)
Therefore, the total cost of making the part per unit = $26 + $10 = $36

Cost of purchasing the part = $24 per unit

Differential cost = Cost of making - Cost of purchasing
= $36 - $24 = $12 per unit

If Piper Corp. were to make 15,000 units of the part instead of purchasing them, the differential cost increase would be:
Differential cost increase = Differential cost x Number of units
= $12 x 15,000
= $180,000

Therefore, the correct answer is C) $30,000 cost increase.