Gelb Company currently manufactures 43,000 units per year of a key component for

Question

Gelb Company currently manufactures 43,000 units per year of a key component for its manufacturing process. Variable costs are $4.05 per unit, fixed costs related to making this component are $67,000 per year, and allocated fixed costs are $73,500 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 $3.70 per unit. Calculate the total incremental cost of making 43,000 and buying 43,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? (Round "purchase price per unit" answer to 2 decimal places.) Complete this question by entering your answers in the tabs below. Outside Supplier Costs to Make Costs to Buy Calculate the total incremental cost of making 43,000 units. (Round "variable cost per unit" answer to 2 decimal places.) Incremental Costs to Make Relevant Total Relevant Amount per Fixed Costs Costs Unit Total incremental cost to make

Explanation / Answer

Incremental Costs to make:

Incremental Costs to buy:

It should buy this component from the outside supplier because buying incremental cost is lower at $232600.

Per unit Units Fixed costs Total Relevant costs Variable cost 4.05 43000 174150 Fixed cost 67000 (avoidable for buying) 67000 Allocated fixed cost 73500 73500 Total Incremental cost to make 314650

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