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ACCA Applied Skills · Performance Management · Make-or-buy and other short-term decisions

Harlow Co makes 4,000 units of part T. Relevant making cost is $22 per unit. A supplier offers T at $25 per unit. If Harlow buys, the freed capacity could be rented out for $18,000 per year. What is the net annual effect of buying instead of making?

Buying gives a net saving of $6,000 a year. Buying costs $12,000 more than making (4,000 units x $3), but the freed capacity earns $18,000 rent, which exceeds the extra purchase cost by $6,000.

  1. A$6,000 savingCorrect
  2. B$12,000 extra cost
  3. C$30,000 saving
  4. D$18,000 saving

Explanation

Making costs 4,000 x $22 = $88,000. Buying costs 4,000 x $25 = $100,000, so $12,000 extra. Rental income of $18,000 offsets this, giving a net saving of $6,000 from buying.

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