The external price is compared, not with the total unit cost of Alpha, Beta and Gamma but with the variable cost per unit

The manufacturer is still faced with paying the fixed cost

Buying in the components will cost the manufacturer the cost per unit + the associated fixed costs per unit

For Alpha, that’s a total of $8 + $6 = $14 whereas the component can be produced internally for $12

For Beta, it’s $18 + $12, a total of $30 and that compares with an internal cost of $32

For Gamma, the equivalent figures are $19 + $4, a total of $23 and that compares with the existing unit cost of production of $20

So the manufacturer should consider buying in only the component Beta

OK?

MikeLittle says
November 21, 2018 at 9:18 am
The external price is compared, not with the total unit cost of Alpha, Beta and Gamma but with the variable cost per unit
The manufacturer is still faced with paying the fixed cost
Buying in the components will cost the manufacturer the cost per unit + the associated fixed costs per unit
For Alpha, that’s a total of $8 + $6 = $14 whereas the component can be produced internally for $12
For Beta, it’s $18 + $12, a total of $30 and that compares with an internal cost of $32
For Gamma, the equivalent figures are $19 + $4, a total of $23 and that compares with the existing unit cost of production of $20
So the manufacturer should consider buying in only the component Beta
OK?
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AravindhJ says
November 21, 2018 at 6:34 am
Can someone explain the answer to the 3rd question clearly?
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