Question

Gilberto Company currently manufactures 80.000 units per year of one of its crucial parts. Variable costs are $2.70 per unit, fixed costs related to making this part are $90,000 per year, and allocated fixed costs are $77,000 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 $3.90 per unit guaranteed for a three-year period Calculate the total incremental cost of making 80,000 and buying 80.000 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 80,000 units. (Round cost per unit answers to 2 decimal places.) Incremental Costs to Make Relevant Amount per Relevant Fixed Total Relevant Unit Costs Total incremental cost to make < Costs to Make Costs to Buy >

Answer 1

Incremental Costs to Make
	Relevant Amount per unit	Relevant Fixed Costs	Total Relevant Costs
Variable costs	$2.70	-	$216,000
Fixed costs related to making this part	$1.125	$90,000	$90,000
Allocated fixed costs	-	-	-
Total Incremental costs to make			$306,000

Fixed costs related to making this part = Total fixed costs associated with this part / 80,000 units = $90,000 / 80,000 = $1.125 per unit.

Allocated fixed costs - It is an irrelevant costs as it has to incurred either the part is manufactured or purchased from outside supplier. Therefore, not important for decision making of the company.

Incremental Costs to Buy
	Relevant Amount per unit	Relevant Fixed Costs	Total Relevant Costs
Variable costs	$3.90	-	$312,000
Fixed costs related to making this part	-	-	-
Allocated fixed costs	-	-	-
Total Incremental costs to buy			$312,000

Only costs related to buying the part from the supplier is relevant for decision making.

Should Gilberto make the part or purchase it from the outside supplier?

Make the part

As it would result in additional profit of $6,000 ( $312,000 - $306,000 ) annually.