Problem:
Vintech Manufacturing incurs unit costs of $7 ($4 variable and $3 fixed) in making a subassembly part for its finished product. A supplier offers to make 17,000 of the part at $5.60 per unit. If the offer is accepted, Vintech will save all variable costs but no fixed costs.
Prepare an analysis showing the total cost saving, if any, Vintech will realize by buying the part. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)
Make Buy Net Income Increase
(Decrease)
Variable manufacturing costs
Fixed manufacturing costs
Purchase price
Total annual cost
The decision should be to buy the part or make the part?