A company makes a component for £14 variable cost per unit plus £4 per unit of absorbed fixed overhead that would continue whether or not it makes the component. A supplier offers to sell the component for £15. What is the financial effect of buying instead of making, per unit?
Answer and explanation
Correct answer: C. Buying is £1 per unit more expensive than making
- Step 1: Relevant cost of making = avoidable costs only = £14 variable cost per unit.
- Step 2: Fixed overhead of £4 continues in either case, so it is not relevant.
- Step 3: Buying at £15 costs £1 more per unit than making at £14.
Answer
Buying is £1 per unit more expensive than making.
Why not the others: This compares the buying price with the full absorbed cost of £18, although £4 of the cost is not avoided. This takes the correct difference but gets the direction wrong. This treats the absorbed fixed overhead as the difference.
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