Bacrometer, Inc., makes part no. 566 on one of its production lines. Each month Bacrometer makes 6,000 of part no. 566 at a variable cost of $4 per part. Bacrometer has been provided a bid for part no. 566 from another manufacturer that will make the part for $5 per part. Bacrometer knows the production line could be rented to another manufacturer for $8,000 per month. Fixed costs associated with the production line will remain unchanged regardless of the company's decision. a. Compute the incremental cost to make with the incremental cost to buy. Remember the incremental cost to make includes the opportunity cost of the foregone rent revenue. b. Should Bacrometer continue to make part no. 566?

A. Incremental cost to make $32,000

Incremental cost to buy $30,000

B. Bacrometer should NOT continue to make part no. 566

Explanation:

a. Computation for the incremental cost to make with the incremental cost to buy.

Calculation for Incremental cost to make

Using this formula

Incremental cost to make = Opportunity cost + Variable cost of making

Let plug in the formula

Incremental cost to make= $8,000 + (6,000 x $4)

Incremental cost to make=$8,000+$24,000

Incremental cost to make = $32,000

Therefore Incremental cost to make is $32,000

Calculation for Incremental cost to buy using this formula

Incremental cost to buy = Purchase price per unit x Number of units purchased

Let plug in the formula

Incremental cost to buy= $5 x 6,000

Incremental cost to buy= $30,000

Therefore Incremental cost to buy is $30,000

b. Based on the above calculation Bacrometer should NOT continue to make part no. 566 reason been that the incremental cost to make which has the amount of $32,000 is higher than the incremental cost to buy which has the amount of $30,000.

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