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Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $16 p unit. The unit cost for the business to make the part is $21 including fixed costs and $9 excluding fixed costs. If 36,347 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount o differential cost increase or decrease from making the part rather than purchasing it? O a. $254,429 cost increase O b. $581,552 cost decrease O c. $181,735 cost increase O d. $254,429 cost decrease

Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $16 p unit. The unit cost for the business to make the part is $21 including fixed costs and $9 excluding fixed costs. If 36,347 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount o differential cost increase or decrease from making the part rather than purchasing it? O a. $254,429 cost increase O b. $581,552 cost decrease O c. $181,735 cost increase O d. $254,429 cost decrease

FINANCIAL ACCOUNTING
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 53
### Sage Company Cost Analysis #### Background: Sage Company is operating at 90% of its manufacturing capacity and currently buys a specific part for \$16 per unit. The cost to produce this part in-house is \$21 per unit, which includes both fixed and variable costs. The variable cost alone is \$9 per unit. #### Problem Statement: The problem requires determining the differential cost impact of manufacturing the part in-house using the unused capacity, instead of continuing to purchase it. The number of units in question is 36,347. #### Question: What would be the amount of differential cost increase or decrease from making the part rather than purchasing it? 1. a. \$254,429 cost increase 2. b. \$581,552 cost decrease 3. c. \$181,735 cost increase 4. d. \$254,429 cost decrease **Differential Cost Analysis:** 1. **Current Purchase Cost:** - Purchase cost per unit = \$16 - Total purchase cost for 36,347 units = 36,347 units * \$16/unit = \$581,552 2. **Manufacturing Cost:** - Variable cost per unit = \$9 - Total manufacturing cost for 36,347 units excluding fixed costs = 36,347 units * \$9/unit = \$327,123 3. **Comparison:** - Differential cost = Total purchase cost - Total manufacturing cost - Differential cost = \$581,552 - \$327,123 = \$254,429 (cost decrease) The correct option is: - **d. \$254,429 cost decrease.** This means Sage Company would save \$254,429 by manufacturing the part in-house instead of purchasing it, assuming they use the available 10% unused capacity.
Transcribed Image Text:### Sage Company Cost Analysis #### Background: Sage Company is operating at 90% of its manufacturing capacity and currently buys a specific part for \$16 per unit. The cost to produce this part in-house is \$21 per unit, which includes both fixed and variable costs. The variable cost alone is \$9 per unit. #### Problem Statement: The problem requires determining the differential cost impact of manufacturing the part in-house using the unused capacity, instead of continuing to purchase it. The number of units in question is 36,347. #### Question: What would be the amount of differential cost increase or decrease from making the part rather than purchasing it? 1. a. \$254,429 cost increase 2. b. \$581,552 cost decrease 3. c. \$181,735 cost increase 4. d. \$254,429 cost decrease **Differential Cost Analysis:** 1. **Current Purchase Cost:** - Purchase cost per unit = \$16 - Total purchase cost for 36,347 units = 36,347 units * \$16/unit = \$581,552 2. **Manufacturing Cost:** - Variable cost per unit = \$9 - Total manufacturing cost for 36,347 units excluding fixed costs = 36,347 units * \$9/unit = \$327,123 3. **Comparison:** - Differential cost = Total purchase cost - Total manufacturing cost - Differential cost = \$581,552 - \$327,123 = \$254,429 (cost decrease) The correct option is: - **d. \$254,429 cost decrease.** This means Sage Company would save \$254,429 by manufacturing the part in-house instead of purchasing it, assuming they use the available 10% unused capacity.
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