Gilberto Company currently manufactures 50,000 units per year of one of its cruc

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?

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

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

Explanation / Answer

Gilberto Company

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Incremental Costs to Make Relevant Amount per Unit Relevant fixed costs Total relevant costs Variable cost 150000.00 0 150000 Fixed costs 50000 50000 Total incremental cost to make 200000 Incremental Costs to Buy Relevant Amount per Unit Relevant fixed costs Total relevant costs Purchase price 180000.00 0 180000 Total incremental cost to buy 180000 The company should manufacture or buy from the outside supplier Buy

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