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In Month 3 Horngren Co correctly calculates that it should be able to make 5,000
units of Natural, 15,000 units of Luxury and 2,000 units of Fruity internally. The
balance of Fruity required should be bought from the external supplier.
How would this plan change if making Fruity internally incurred an incremental
fixed cost of $8,000?
Options:
A. The plan would not change
B. All units of fruity would be bought externally
C. All units of Fruity would be made internally
D. 4,500 units of Fruity would be made internallyThis is the question from PM examiner report March/june 2022
Section B question
Literally sir I dont understand what the question is asking and why the answer is option A ?How would this plan change if making Fruity internally incurred an incremental
fixed cost of $8,000?So what it’s looking for is your ability as a student to recognise the possible effects of internal incremental costs.
Do they impact the business?The incremental fixed cost of $8,000 for making Fruity internally does not affect the overall decision to produce the specified quantities of Natural, Luxury, and Fruity.
The company would still find it more cost-effective to produce the planned amounts internally and purchase any remaining Fruity from external suppliers, as the fixed costs would be incurred regardless of the production decision for Fruity. Thus, the original plan remains unchanged.
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