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ACCA Applied Skills · Performance Management · Relevant cost analysis

Delta Ltd needs 10,000 units of a part. Making them costs $8 variable per unit plus fixed costs of $30,000 that are avoidable only if Delta buys. A supplier quotes $10.50 per unit. What is the financial effect of buying instead of making?

Buying saves $5,000. Making costs $110,000 (variable $80,000 plus avoidable fixed $30,000), while buying costs $105,000. Because the fixed costs are avoidable when buying, they are relevant and must be included in the comparison.

  1. A$5,000 savingCorrect
  2. B$5,000 extra cost
  3. C$25,000 extra cost
  4. D$30,000 saving

Explanation

Make cost = 10,000 x $8 + $30,000 = $110,000. Buy cost = 10,000 x $10.50 = $105,000. Buying saves $5,000. Ignoring the avoidable fixed costs would wrongly show a $25,000 extra cost for buying.

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