Answer:
If the company choses to buy the product, its profit will increase by $20,000 ($650,000 - $630,000).
Explanation:
1. The per unit and total relevant cost for buying and making the product will be computed as follows:
Check the following attached image.
Note: In a make or buy decision, relevant costs are costs that can be avoided if the company purchases the product from an outside spplier. Therefore, only $3 ($9 x 1/3) per unit of fixed overhead costs are relevant because $6 ($9 x 2/3) of fixed overhead costs are unavoidable.
2. The amount of increase or decrease in profits if outside supplier's offer is accepted will be computed as follows:
Total relevant costs to make = $570,000
If the company choses to buy the product from outside supplier, it could earn annual rent of $80,000.
Thus, $80,000 is the opportunity cost which is being incurred when the company makes the products.
Taking the opportunity cost into considration, total cost to make = $570,000 + $80,000 = $650,000
And,
Total relevant costs to buy = $630,000
Thus,
If the company choses to buy the product, its profit will increase by $20,000 ($650,000 - $630,000).
