Question

Gilberto Company currently manufactures 80,000 units per year of one of its crucial parts. Variable costs are $2.40 per unit, fixed costs related to making this part are $80,000 per year, and allocated fixed costs are $40,000 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 $3.50 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 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 cost of making 80,000 units:

Incremental Costs to Make Relevant Relevant Total relevant fixed costs amount per unit costs Variable cost per unit $ $ 2.40 192,000 80,000 $ Fixed manufacturing cost $ 80,000 $ Total incremental cost to make 272,000

Incremental cost of buying 80,000 units:

Incremental Costs to Buy Relevant Relevant Total relevant fixed costs amount per unit costs Purchase price per unit 280,000 3.50 Total incremental cost to buy $ 280,000

Decision: The company should continue to manufacture the part as there is a loss of $8,000 when company buy from outside.