Colin’s caps makes baseball hats. the company is deciding whether to buy the hats from a company that will produce them for $5 per hat. colin’s variable costs are $2 per unit, and its annual fixed costs are $75,000. the company makes 20,000 hats per year. if the hats are bought, all variable costs and 60% of annual fixed costs will be eliminated. which is better for colin, making or buying the hats?

The better option would be to buy the hats since he would save $85,000

Explanation:

Consider the total costs of the hats for the tow cases;

Case 1: Colin's Caps

Total annual cost=(Cost per unit×number of units)+Annual fixed costs

where;

Cost per unit=$2

Number of units in a year=20,000 hats

Annual fixed costs=$75,000

replacing;

Total annual cost=(2×20,000)+75,000

Total annual cost=40,000+75,000=115,000

Total annual cost for Colin's Caps=$115,000

Case 2: Buying the hats

Total buying cost=variable cost+40% of annual fixed costs

where;

variable cost=0

Annual fixed cost=(40/100)×75,000=30,000

replacing;

Total cost of buying=(0+30,000)=30,000

Total annual cost of buying the hats=$30,000

The better option would be to buy the hats since he would save $85,000

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