Question

The cost to produce Part A was $12 per unit in 2019. During 2020, it has increased to $15 per unit. In 2020, Sandhill Company has offered to supply Part A for $11 per unit. For the make-or-buy decision:



a) incremental revenues are $4 per unit.


b) net relevant costs are $3 per unit.


c) differential costs are $4 per unit.


d) incremental costs are $3 per unit.

Answer 1

Answer:

Differential cost = $4 per unit

Explanation:

For a make or buy decision the relevant cash flows include

1. the differential variable of the two options
2. savings from avoidable fixed costs associated with  internal production

Differential cost = internal cost - External purchase price

                    = 15- 11

                    = $4 per unit