Santos Company currently manufactures one of its crucial parts at a cost of $4.8

Question

Santos Company currently manufactures one of its crucial parts at a cost of $4.85 per unit. This cost is based on a normal production rate of 60,000 units per year. Variable costs are $3.10 per unit, fixed costs related to making this part are $60,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Santos is considering buying the part from a supplier for a quoted price of $3.50 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 60,000 units.Calculate the total incremental cost of buying 60,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks the total incremental cost of making 60,000 units = $3.10 * 60000 + $60000 + $45000 = $291000 the total incremental cost of buying 60,000 units.= $3.50 *60000 + $45000 = $255000 (Allocated fixed costs are unavoidable whether the company makes or buys the part)

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