Gelb Company currently manufactures 40,000 units per year of a key component for

Question

Gelb Company currently manufactures 40,000 units per year of a key component for its manufacturing process. Variable costs are $1.95 per unit, fixed costs related to making this component are $65,000 per year, and allocated fixed costs are $58,500 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 $3.50 per unit. Calculate the total incremental cost of making 40,000 units. (Round "variable cost per unit" answer to 2 decimal places.) Calculate the total incremental cost of buying 40,000 units. (Round "purchase price per unit" answer to 2 decimal places.) Should it continue to manufacture the component, or should it buy this component from the outside supplier? Buy Make

Explanation / Answer

Total Incremental Costs of: Making the Units Buying the Units Variable Manufacturing Costs                      78,000 Fixed cost related to making the units                      65,000 Cost to buy the Units                  140,000 Total Costs                   143,000                  140,000 Should the Company Continue to manufacture the part, or should it buy the part from the outside supplier Buy from ouside Supplier Allocated Fixed Cost is not relevant for Decision making or taken in accounting for Total Cost of the Procduct, since it will havve to beincurred, whether purchased or make the product.

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