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Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $0.60 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? a. $20,000 cost decrease b. $4,000 cost increase c. $1,600 cost increase d. $12,000 cost decrease

Respuesta :

Answer:

The correct option is C) $1600 cost increase.

Explanation:

COST OF BUYING WOULD BE = 4000 UNITS X $8

                                                    = $32,000

COST FOR MANUFACTURING THE PART WOULD BE =

4000 UNITS X $9 - 4000 UNITS X $.60

here we are subtracting the fixed cost from the total cost of manufacturing,a s only the variable cost would be taken in to account.

= $36,000 - $2400

= $33,600

So the difference between making product and buying product is $1600, therefore there would be increase of cost by $1600.

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