Question Content AreaFrank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs. If 20,000 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.$40,000 decreaseb.$40,000 increasec.$60,000 decreased.$60,000 increase

The answer is : (B) $40,000 increase Total cost of purchasing the part= 20,000 units * $25 i.e $500,000 Less: Cost of making the Part 20,000 units * ( $30 - 3) i.e $540,000 Therefore, the answer is: (B) $40,000 increase. Note: fixed cost has been removed because it is a fixed cost and will be incurred irrespective of whether the part is purchased or manufactured within the entity.

Answered: Frank Co. is currently operating at 80%…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question Content Area
Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $25 unit. The unit cost for Frank Co. to make the part is $30, which includes $3 of fixed costs. If 20,000 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.$40,000 decrease

b.$40,000 increase

c.$60,000 decrease

d.$60,000 increase