Gilberto Company currently manufactures 40.000units per year of one of its cruci

Question

Gilberto Company currently manufactures 40.000units per year of one of its crucial parts. Variable costs are $2.40 per unit, fixed costs related to making this re $40,000 per year, and allocated fixed costs are $30,000 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 40.000 units Calculate the total incremental cost of buying 40.000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier

Explanation / Answer

Incremental Cost to Make Relevant Amt. per Unit Relevant Fixed Cost Total Relevant Cost Variable Cost - 40000 Units                 2.40              96,000 Traceable Fixed Cost             30,000              30,000 Total Incremental Cost to Make            126,000 Incremental Cost to Purchase Relevant Amt. per Unit Relevant Fixed Cost Total Relevant Cost Purchase Cost - 40000 Units 3.6 144000 Total Incremental Cost to Buy 144000 Make - The company should make the unit as its Relevant Cost to make ($126000) is less than Relevant Cost to Buy ($144000)

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