Gelb Company currently manufactures 45,000 units per year of a key component for

Question

Gelb Company currently manufactures 45,000 units per year of a key component for its manufacturing process. Variable costs are $5.15 per unit, fixed costs related to making this component are $71,000 per year, and allocated fixed costs are $69,500 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 units. (Round "variable 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 Calculate the total incremental cost of buying 45,000 units. (Round "purchase price per unit" answer to 2 decimal places.) Incremental Costs to Buy Relevant Amount per Unit Relevant Total Relevant Fixed Costs Costs Total incremental cost to buy

Explanation / Answer

Incremental cost to buy

Ans.1 Incremental cost to make Relevant amount Relevant fixed Total Relevant per unit Costs Costs Variable cost 5.15 231750 Fixed manufacturing cost 71000 71000 Total Incremental cost to make 302750 *Total variable cost = 5.15 * 45000 = 231750 Ans.2

Incremental cost to buy

Relevant amount Relevant fixed Total Relevant per unit Costs Costs Cost of purchase 3.9 175500 Total Incremental cost to buy 175500 *The allocated fixed cost will not affect the incremental costs as it is unavoidable whether the company choose to make or buy.

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