Exercise 23-4 Make or buy decision LO A1 Gilberto Company currently manufactures
ID: 2555926 • Letter: E
Question
Exercise 23-4 Make or buy decision LO A1 Gilberto Company currently manufactures 40,000units per year of one of its crucial parts. Variable costs are $3.90 per unit, fixed costs related to making this part are $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 $2.70 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 40,000 units. (Round cost per unit answers to 2 decimal places.) Incremental Costs to Make Relevant muter Relevant fixed Total relevant costs costs Unit Total incremental cost to make 0Explanation / Answer
ANswer:
We will make an calculation for the incremental cost of making 40,000 units as under
Type of cost
Relevant Amount per Unit
Relevant Fixed Cost
Total Relevant Cost
Variable Cost per Unit
3.9
156000
Fixed Manufacturing Overhead
40,000
40,000
Total Incremental Cost to Make
196,000
_____________________________________
2
Now we will make an calculation for the incremental cost of buying 40,000 units as under
Relevant Amount per Unit
Relevant Fixed Cost
Total Relevant Cost
Purchase Price Per Unit
2.7
108000
Total Incremental Cost to Buy
108000
3
Should the company continue to manufacture the part, or should it buy the part from the outside supplier
Answer: Buy
company should buy the part from the outside supplier
Type of cost
Relevant Amount per Unit
Relevant Fixed Cost
Total Relevant Cost
Variable Cost per Unit
3.9
156000
Fixed Manufacturing Overhead
40,000
40,000
Total Incremental Cost to Make
196,000
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