Question

Exercise 23-5 Make or buy LO A1 Gelb Company currently manufactures 56,000 units per year of a key component for its manufacturing process. Variable costs are $6.25 per unit, fixed costs related to making this component are $73,000 per year, and allocated fixed costs are $81,500 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. points Calculate the total incremental cost of making 56,000 and buying 56,000 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.) eBook

Answer 1

COS в Incremental Costs to Make Relevant Relevant Fixed Total Relevant Amount per Costs Costs Unit 3 Variable costs $ 6.25 $ 350,000 4 Fixed manufacturing costs 73,000 $ 73,000 5 6 Total incremental cost to make $ 423,000 Incremental Costs to Buy Relevant Relevant Fixed Amount per Costs Unit $ 3.70 Total Relevant Costs $ 207,200 10 Purchase 11 12 13 Total incremental cost to Buy $ 207,200 15 Giberto should purchase it from the outside supplier as the cost to buy is less than the cost to make.

D C Incremental Costs to Make Relevant Relevant Amount per Fixed Costs Unit 6.25 73000 Total Relevant Costs 2 3 Variable costs 4 Fixed manufacturing costs =+B3*56000 =+C4 6 Total incremental cost to make =+D3+D4 Incremental Costs to Buy Relevant Relevant Amount per Fixed Costs Unit Total Relevant Costs =+B10*56000 10 Purchase 11 12 =+D10 13 Total incremental cost to Buy 14