A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows:

 A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows:

Per unit    Total
Direct materials    $4    $40,000
Direct labor     3     30,000
Fixed plant facility cost     2     20,000
The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change?

Decrease $15,000.
Decrease $10,000.
Increase $5,000.
Increase $10,000.

 You Answered Correctly!
Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable. Thus, the cost to make versus buy is calculated as follows:

Make: variable cost (10,000 units × ($4 + 3)) = $70,000 + fixed plant facility cost = $20,000 = $90,000 total cost

Buy: variable cost ($10,000 × $8) = $80,000 + fixed plant facility costs = $20,000 − $5,000 rent revenue = $95,000 total cost

Thus the decision to buy, rather than to make the part, results in a cost increase of $5,000.