Computers makes 5 comma 900 units of a circuit board, cb76 at a cost of $ 290 each. variable cost per unit is $ 220 and fixed cost per unit is $ 70. peach electronics offers to supply 5 comma 900 units of cb76 for $ 270. if degler buys from peach it will be able to save $ 25 per unit in fixed costs but continue to incur the remaining $ 45 per unit. should degler accept peach's offer? explain.

There is a loss on buying from outside supplier ,Peach's offer should not be accepted.

Explanation:

Variable cost is a cost that varies with number of units produced or sold so it is always a relevant cost while making decision.

Fixed cost remains constant irrespective of number of units so it is a irrelevant cost unless avoidable.So in the given case ,fixed cost $70 is irrelevant since same will be incurred whether purchased or manufactured.

Incremental savings  

Saving in variable cost   220

saving in fixed cost   25

Total saving                   245

less: Incremental cost(270)

Incremental profit /(loss) on buying from outside supplier(25)

Total loss25*5900= -147500

Therefore, There is a loss on buying from outside supplier ,Peach's offer should not be accepted.

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