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

Question

Gilberto Company currently manufactures 80,000units per year of one of its crucial parts. Variable costs are $1.80 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 $3.00 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 80,000 units. (Round cost per unit answers to 2 decimal places.) Incremental Costs to Make Amount per Relevant fixed Total relevant costs costs Unit Total incremental cost to make Calculate the total incremental cost of buying 80,000 units. (Round cost per unit answers to 2 decimal places.) Incremental Costs to Buy Relevant Relevant Total relevant Amount per fixed costs costs Unit Total incremental cost to buy Should the company continue to manufacture the part, or should it buy the part from the outside supplier? OBuy Make

Explanation / Answer

Solution:

i.

Incremental Cost of Making the Part

Variable costs (80,000 units @ $1.80) $144,000

Incremental fixed costs 80,000

Total incremental cost of making 80,000 units $224,000

ii.

Incremental Cost of Buying the Part

Cost per unit to buy $3.00

Total incremental cost of buying 80,000 units $240,000

The allocated fixed costs of $40,000 are not relevant to the managerial decision because it will continue whether it is made or bought. Hence, the incremental costs of making the part are $16,000 less per year than buying it. This indicates that company should continue to make this part.

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