Question

Gilberto Company currently manufactures 50,000 units per year of one of its crucial parts. Variable costs are $3.00 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $55,000 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 $3.60 per unit guaranteed for a three-year period. Calculate the total incremental cost of making and buying 50,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Inc Costs to Make Inc Costs to Buy Calculate the total incremental cost of making 50,000 units. (Round cost per unit answer to 2 decimal places.) Incremental Costs to Make Relevant Amount per Unit Relevant Fixed Costs Total Relevant Costs Total incremental cost to make 0

Farrow Co. expects to sell 400,000 units of its product in the next period with the following results.

The company has an opportunity to sell 40,000 additional units at $12 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $172,000.

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $12 per unit.
Should the company accept or reject the offer? ?Should the company accept or reject the offer?

Answer 1

X for 1 4 AB G H I incremental costs to make relevant amount per unit relevant fixed costs variable costs avoidable fixed costs total relevant costs $ 150,000 $ 50,000 $ 200,000 50,000 total incremental cost to make incremental costs to buy relevant amount per unit $ 4 relevant fixed costs total relevant costs $ 180,000 variable costs e costs total incremental cost to buy $ 180,000 since the total incremental cost is less by $20,000 in case of buy, the company should buy from the outside supplier normal volume additional volume combined total $ 6,000,000 $ 480,000$ 6,480,000 sales revenue costs and expenses: direct materials direct labor overhead selling expenses administrative expenses total cost and expenses incremental income (loss) from new business $ $ $ $ $ $ $ 800,000 $ 1,600,000 $ 400,000 $ 600,000 $ 1,028,000 $ 4,428,000 $ 1,572,000 $ 80,000 $ 160,000 $ 60,000 $ - $ 172,000 $ 472,000 $ 8,000 $ 880,000 1,760,000 460,000 600,000 1,200,000 4,900,000 1,580,000 since, there is incremental income of $8,000 from the new business the company should accept the offer

for formulas and calculations, refer to the image below -

1 x fc 1 ДА В D E F G H I incremental costs to make relevant amount per unit relevant fixed costs variable costs avoidable fixed costs total relevant costs =D4*50000 =E5 =SUM(F4:F5) 50000 total incremental cost to make incremental costs to buy relevant amount per unit relevant fixed costs total relevant costs variable costs 3.6 =D10*50000 total incremental cost to buy | ESUM(F10:F11) I since the total incremental cost is less by $20,000 in case of buy, the company should buy from the outside supplier normal volume 6000000 additional volume =40000*12 combined total =D17+E17 sales revenue costs and expenses: direct materials direct labor overhead selling expenses administrative expenses total cost and expenses incremental income (loss) from new business 800000 1600000 400000 600000 1028000 =SUM(D19:023) =D17-D24 =D19/400000*40000 =D19+E19 =D20/400000*40000 =D20+E20 =D21*0.15 =D21+E21 =D22+E22 172000 =D23+E23 ESUM(E19:23) =D24+E24 =E17-E24 =D25+E25 since, there is incremental income of $8,000 from the new business the company should accept the offer