Gelb Company currently manufactures 45,000 units per year of a key component for
ID: 2429901 • Letter: G
Question
Gelb Company currently manufactures 45,000 units per year of a key component for its manufacturing process. Variable costs are $2.95 per unit, fixed costs related to making this component are $81,000 per year, and allocated fixed costs are $71,500 per year. The allocated fixed costs are unavoidable whether the company makes or buys this component. The company is considering buying this component from a supplier for $3.90 per unit. Calculate the total incremental cost of making 45,000 and buying 45,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? (Round "purchase price per unit" answer to 2 decimal places.) Complete this question by entering your answers in the tabs below Outside Supplier Costs to Make Costs to Bu Calculate the total incremental cost of making 45,000 units. (Round "variable cost per unit answer to 2 decimal places.) Incremental Costs to Make Relevant Relevant Amount per Fixed Costs Total Relevant Costs Unit Total incremental cost to make Costs to Make Costs to Buy>Explanation / Answer
Answer:
1
Incremental Costs to Make
Relevant Amount per unit
Relevant Fixed Costs
Total Relevant Cost
Variable manufacturing cost (2.95*45000)
2.95
0
132,750
Fixed Costs Relating to making the unit (in $)
0
81,000
81,000
Total Incremental Costs to Make
213,750
___________________________________________________
2
Incremental Costs to Buy
Relevant Amount per unit
Relevant Fixed Costs
Total Relevant Cost
Cost to Buy the Units (3.90*45000)
3.9
0
175,500
Allocated Fixed Costs (in $)
0
0
Total Incremental Costs to Make
175,500
___________________________________
3
Company should buy a product from outside supplier
Incremental Costs to Make
Relevant Amount per unit
Relevant Fixed Costs
Total Relevant Cost
Variable manufacturing cost (2.95*45000)
2.95
0
132,750
Fixed Costs Relating to making the unit (in $)
0
81,000
81,000
Total Incremental Costs to Make
213,750
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