Gilberto Company currently manufactures 80,000 units per year of one of its cruc

Question

Gilberto Company currently manufactures 80,000 units per year of one of its crucial parts. Variable costs are $2.30 per unit, fixed costs related to making this part are $80,000 per year, and allocated fixed costs are $40,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto 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 80,000 and buying 80,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Costs to Make: (Calculate the total incremental cost of making 80,000 units. (Round cost per unit answer to 2 decimal places.)

Costs to Buy: (Calculate the total incremental cost of buying 80,000 units. (Round cost per unit answer to 2 decimal places.)

Outside Supplier: Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Incremental Costs to Make Relevant Amount per Unit Relevant fixed costs Total relevant costs Total incremental cost to make

Explanation / Answer

Note: The allocated fixed costs are unavoidable whether the company makes or buys the part and hence they are irrelevant and not considered in the analysis.

Incremental Costs to Make Relevant Amount per Unit Relevant fixed costs Total relevant costs Variable cost 184000.00 0 184000 Fixed costs 80000 80000 Total incremental cost to make 264000 Incremental Costs to Buy Relevant Amount per Unit Relevant fixed costs Total relevant costs Purchase price 280000.00 0 280000 Total incremental cost to buy 280000

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