During 2021, it costs Miller, Inc. $14 per unit to produce part T5. During 2022, it has increased to $16 per unit. In 2021, King Company has offered to provide Part T5 for $13 per unit to Miller. As it pertains to the make-or-buy decision, which statement is true?
Differential costs are $4 per unit.
Incremental costs are $3 per unit.
Net relevant costs are $3 per unit.
Incremental revenues are $1 per unit.
Net relevant costs are $3 per unit.
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To determine the true statement regarding the make-or-buy decision, we need to understand the concepts of differential costs, incremental costs, net relevant costs, and incremental revenues.
1. Differential costs: These are the differences in costs between two alternatives, in this case, between making or buying the product. In this scenario, the differential cost is the difference between Miller's cost of producing part T5 ($14 per unit in 2021 and $16 per unit in 2022) and the cost offered by King Company ($13 per unit). So the differential cost per unit is $14 - $13 = $1.
2. Incremental costs: Incremental costs are the additional costs incurred by choosing one alternative over another. In this case, if Miller decides to buy part T5 from King Company, the incremental cost would be the difference between the cost of buying from King Company ($13 per unit) and Miller's original cost ($14 per unit in 2021). So the incremental cost per unit is $13 - $14 = -$1.
3. Net relevant costs: This term refers to the costs that are relevant and significant in the decision-making process. In this scenario, the net relevant cost would consider the differential cost and any other relevant costs associated with making or buying the product. The information provided does not mention any other costs, so we can assume that the net relevant cost is the same as the differential cost, which is $1 per unit.
4. Incremental revenues: Incremental revenues are the additional revenues that could be gained from choosing one alternative over another. However, the question does not provide any information about revenues or any incremental revenue associated with the make-or-buy decision. Therefore, we cannot determine the incremental revenues based on the given information.
Based on the information provided, the true statement regarding the make-or-buy decision is that the differential costs are $1 per unit.