Sharp Corporation produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows: Variable production cost $ 16 Fixed production cost 20 Unit product cost $ 36 The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be:

It is cheaper to produce the part. Buying it will impact income by a $56,000 decrease.

Explanation:

Giving the following information:

Units= 8,000

Production:

Variable production cost= $16

Avoidable Fixed production cost= (20*0.25)= 5

Unitary cost= $21

Three parts of the fixed costs remain on both options, therefore, they are irrelevant for the decision-making process.

The parts can be purchased from an outside supplier for only $28 each.

Production:

Total cost= 8,000*(16 + 5)= $168,000

Buy:

Total cost= 8,000*28= $224,000

It is cheaper to produce the part. Buying it will impact income by a $56,000 decrease.