Question

Gilberto Company currently manufactures 70,000 units per year of one of its crucial parts. Variable costs are $2.30 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 $3.40 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 c or should it buy the part from the outside supplier? continue to manufacture the part Complete this question by entering your answers in the tabs below. Costs to Make Costs to Bu Supplier Calculate the total incremental cost of making 70,000 units. (Round cost per unit answer to 2 decimal places.) l Costs to Make Relevant Relevant fixed Total relevant costs Unit 161,000 S 35,000 161,000 Total cost to make Costs to Buy>

Answer 1

Answer-

Incremental cost to make
Particulars	Relevant amount per unit	Relevant fixed costs	Total Relevant costs
			$
Variable cost per unit	$2.30		$2.30*70000 units=161000
Fixed manufacturing costs		$70000-$35000=$35000	35000
Total incremental cost to make			196000
Incremental cost to buy
Particulars	Relevant amount per unit	Relevant fixed costs	Total Relevant costs
Purchase price per unit	$3.40		$3.40*70000 units=238000
Total incremental cost to buy			238000

Company should continue to manufacture the part instead of buying from outside supplier because cost of making is lesser than cost of buying.