Gelb Company currently manufactures 40,000 units per year of a key component for
ID: 2461485 • Letter: G
Question
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. Calculate the total incremental cost of making 40,000 units. (Round "variable cost per unit" answer to 2 decimal places.) Calculate the total incremental cost of buying 40,000 units. (Round "purchase price per unit" answer to 2 decimal places.)Explanation / Answer
Incremental cost of making units
Relevant cost :
Variable cost @ 1.95 p.u 40000 × 1.95 = $78000
avoidable fixed cost. (65000 - 58500) = $6500
Total cost = $ 84500
Cost per unit = 84500/40000 = 2.1125
Incremental cost of making is nil , as it has saving of $3.5 - 2.1125
=$1.3875 and it is also incremental cost of buying.
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