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.

Question

Robert Maddox

Business

19 September, 05:18

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.

+5

Answers (1)

Know the Answer?

Russell · Answer 1

Differential cost = $4 per unit

Explanation:

For a make or buy decision the relevant cash flows include

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

Differential cost = internal cost - External purchase price

= 15 - 11

= $4 per unit