Question

Gilberto Company currently manufactures 70,000 units per year of one of its crucial parts. Variable costs are $1.80 per unit, fixed costs related to making this part are $70,000 per year, and allocated fixed costs are $35,000 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 $2.90 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 70,000 and buying 70,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Complete this question by entering your answers in the tabs below. Costs to Make Costs to Buy Outside Supplier Calculate the total incremental cost of making 70,000 units. (Round cost per unit answer to 2 decimal places.) Incremental Costs to Make Relevant Relevant fixed Amount per costs Unit Total relevant costs Total incremental cost to make

Answer 1

Incremental Costs to Make
	Relevant Amount per Unit	Relevant fixed costs	Total relevant costs
Variable cost	1.80		126000
Fixed costs		70000	70000
Total incremental cost to make			196000
Incremental Costs to Buy
	Relevant Amount per Unit	Relevant fixed costs	Total relevant costs
Purchase price	2.90		203000
Total incremental cost to buy			203000

Gilberto should make the part.