Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36, including fixed costs, and $26, not including fixed costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it? a. $180,000 cost increase b. $30,000 cost increase c. $30,000 cost decrease d. $180,000 cost decrease

Option B is correct

$30,000 increase

Explanation:

                                                                                      $

The cost of internal production ($26 × 15,000)= 390,000

The cost of purchase = ($24 × 15,000)            =  (360,000 )

Differential cost  (increase)                                     30,000

Note that the fixed cost was not included in the cost of manufacturing . This is so because they they are not relevant for this decision. They would be incurred either way whether or not the parts are made or purchased

There would be an increase of $30,000 if the parts are made rather purchasing them

b. $30,000 cost increase

Explanation:

Given Data:

Operating capacity = 70%

Purchased price = $24

Production price including fixed cost = $36

Production price excluding fixed cost = $26

Units purchased = 15000

Therefore:

Production price excluding fixed cost

= $26 * 15000

= $390,000

Cost of purchasing

= $24 * 15000

= $360,000

Amount of differential cost

= $390,000 - $360,000

= $30,000

This represents a $30,000 increase.

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