Gelb Company currently manufactures 41,000 units per year of a key component for

Question

Gelb Company currently manufactures 41,000 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 78,500 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 41,000 units. (Round "variable cost per unit" answer to 2 decimal places.) Incremental Costs to Make Relevant Relevant Total Relevant Amount per Fixed Costs Costs Unit Total incremental cost to make Calculate the total i 2 decimal places.) I cost of buying 41,000 units. (Round "purchase price per unit" answer to Incremental Costs to Buy Relevant Relevant Total Relevant Amount per Fixed Costs Costs Unit Total incremental cost to buy Should it continue to manufacture the component, or should it buy this component from the outside supplier?

Explanation / Answer

Relevant Amount per Unit   Relevant fixed Costs Total Variable cost per unit 5.15 211150 Fixed manufacturing costs 71000 71000 Total incremental cost to make 282150 Relevant Amount per Unit   Relevant fixed Costs Total Purchase price per unit 3.5 143500 Fixed manufacturing costs Total incremental cost to buy 143500 Buy from outside supplier

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