MikeLittle saysNovember 21, 2018 at 9:18 amThe external price is compared, not with the total unit cost of Alpha, Beta and Gamma but with the variable cost per unitThe manufacturer is still faced with paying the fixed costBuying in the components will cost the manufacturer the cost per unit + the associated fixed costs per unitFor Alpha, that’s a total of $8 + $6 = $14 whereas the component can be produced internally for $12For Beta, it’s $18 + $12, a total of $30 and that compares with an internal cost of $32For Gamma, the equivalent figures are $19 + $4, a total of $23 and that compares with the existing unit cost of production of $20So the manufacturer should consider buying in only the component BetaOK?Log in to Reply

AravindhJ saysNovember 21, 2018 at 6:34 amCan someone explain the answer to the 3rd question clearly?Log in to Reply

MikeLittle says

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?

AravindhJ says

Can someone explain the answer to the 3rd question clearly?