Gilberto Company currently manufactures one of its crucial parts at a cost of $3

Question

Gilberto Company currently manufactures one of its crucial parts at a cost of $3.30 per unit. This cost is based on a normal production rate of 80,000 units per year. Variable costs are $1.80 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 $3.00 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 80,000 units.

Explanation / Answer

The crucial part can be bought from a supplier for a price of $3.00 per unit. The unavoidable fixed cost on buying the part is $40,000 per year.

So, Total Buying cost of 80,000 units = 80000 * $3 + $40,000 = $280,000

Total Cost incurred on making the crucial part =

= 80000 * $3.30 = $ 264,000

Incremental cost of making 80,000 units = $280,000 - $ 264,000 = $16,000

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