Question

Tom's Toolery is operating at 80% of its productive capacity. It is currently paying $20 per unit for a part used in its manufacturing operation. Tom's estimates it could make the part internally for a total cost of $24 per unit, consisting of $18 of unit-level production costs and $6 of facility-level costs that are currently attributed to other products. Tom's usually purchases 50,000 units of the part each year. These units could be manufactured using Tom's excess capacity. What is the effect on cost if the company decides to start making the part?

Answer 1

Answer:

The company will spend $200,000 more if they decide to manufacture the part internally.

Explanation:

Effect on cost if the company starts making the part can be expressed as;

Change in cost=Final cost-Initial cost

Final cost is the cost when Tom decides to produce the part internally which is 24 dollars per unit

Initial cost is the cost when Tom decides to pay for the part to be manufactured externally

where;

Initial cost=Cost per unit×number of units

Cost per unit=$20

number of units=50,000 units

Replacing;

Initial cost=(20×50,000)=$1,000,000

Final cost=Cost per unit×number of units

Cost per unit=$24

number of units=50,000 units

Replacing;

Initial cost=(24×50,000)=$1,200,000

Change in cost=Final cost-Initial cost

(1,200,000-1,000,000)=$200,000

The company will spend $200,000 more if they decide to manufacture the part internally.