Question

Gilberto Company currently manufactures 65,000 units per year of one of its crucial parts. Variable costs are $1.95 per unit, fixed costs related to making this part are $75,000 per year, and allocated fixed costs are $62,000 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 $3.25 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 65,000 and buying 65,000 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 65,000 units. (Round cost per unit answers to 2 decimal places.) Incremental Costs to Make Relevant Amount per Relevant Fixed Unit Costs Total Relevant Costs Total incremental cost to make < Costs to Make Costs to Buy >

Answer 1

Solution:

Incremental costs to make
Particulars	Relevant amount per unit	Relevant fixed costs	Total relevant costs
Variable costs	$1.95		$126,750.00
Fixed costs		$75,000.00	$75,000.00
Total incremental cost to make			$201,750.00

Incremental costs to Buy
Particulars	Relevant amount per unit	Relevant fixed costs	Total relevant costs
Variable costs	$3.25		$211,250.00
Fixed costs		$0.00	$0.00
Total incremental cost to buy			$211,250.00

Should Gilberto make the part or buy it from outside supplier

Make the Part