2 Exercise 23-5 Make or buy LO A1 Gelb Company currently manufactures 40,000 uni
ID: 2399488 • Letter: 2
Question
2 Exercise 23-5 Make or buy LO A1 Gelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are $1.95 per unit, fixed costs related to making this component are $65,000 per year, and allocated fixed costs are $58,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.50 per unit. ints Calculate the total incremental cost of making 40,000 units and buying 40,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? eBook Hint Complete this question by entering your answers in the tabs below Costs to Make Costs to Buy Supplier Print Calculate the total incremental cost of buying 40,000 units. (Round "purchase price per unit" answer to 2 decimal places.) References l Costs to Buy Relevant Relevant Total Relevant Amount pr Fixed Costs Costs Unit Total incremental cost to buy Costs to Make Outside Supplier>Explanation / Answer
Incremental Costs to Make
Relevant Amount per unit
Relevant Fixed Costs
Total Relevant Cost
Variable manufacturing cost (in $)(1.95×40,000)
1.95
0
78,000
Fixed Costs Relating to making the unit (in $)
0.00
65,000
65,000
Total Incremental Costs to Make
143,000
a.
b.
Incremental Costs to Buy
Relevant Amount per unit
Relevant Fixed Costs
Total Relevant Cost
Cost to Buy the Units (in $)(3.5×40,000)
3.50
0
140,000
Allocated Fixed Costs (in $)
0
0
Total Incremental Costs to Make
140,000
Note that the allocated fixed costs of $58,500 are not relevant to this managerial decision because they will continue whether the part is made or bought. Therefore, the incremental costs of making the part are $3,000 more per year than buying it. This implies that the company should buy this part from the outside supplier.
Incremental Costs to Make
Relevant Amount per unit
Relevant Fixed Costs
Total Relevant Cost
Variable manufacturing cost (in $)(1.95×40,000)
1.95
0
78,000
Fixed Costs Relating to making the unit (in $)
0.00
65,000
65,000
Total Incremental Costs to Make
143,000
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