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5 May, 16:39

Computers makes 5 comma 900 units of a circuit board, CB76 at a cost of $ 290 each. Variable cost per unit is $ 220 and fixed cost per unit is $ 70. Peach Electronics offers to supply 5 comma 900 units of CB76 for $ 270. If Degler buys from Peach it will be able to save $ 25 per unit in fixed costs but continue to incur the remaining $ 45 per unit. Should Degler accept Peach's offer? Explain.

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  1. 5 May, 17:09
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    There is a loss on buying from outside supplier, Peach's offer should not be accepted.

    Explanation:

    Variable cost is a cost that varies with number of units produced or sold so it is always a relevant cost while making decision.

    Fixed cost remains constant irrespective of number of units so it is a irrelevant cost unless avoidable. So in the given case, fixed cost $70 is irrelevant since same will be incurred whether purchased or manufactured.

    Incremental savings

    Saving in variable cost 220

    saving in fixed cost 25

    Total saving 245

    less: Incremental cost (270)

    Incremental profit / (loss) on buying from outside supplier (25)

    Total loss 25*5900 = - 147500

    Therefore, There is a loss on buying from outside supplier, Peach's offer should not be accepted.
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