Gilberto Company currently manufactures 80,000 units per year of one of its cruc
ID: 2568824 • Letter: G
Question
Gilberto Company currently manufactures 80,000 units per year of one of its crucial parts. Variable costs are $1.70 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 $2.80 per unit guaranteed for a three-year period.
Calculate the total incremental cost of making 80,000 and buying 80,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?
Explanation / Answer
Incremental cost to make 80000 Units
Relevant amount per Unit
Relevant Fixed costs
Total relevant costs
Variable Costs
1.7
136000
Fixed Manufacturing Overheads
80000
80000
Total Incremental cost to Make
216000
Incremental cost to Buy 80000 Units
Relevant amount per Unit
Relevant Fixed costs
Total relevant costs
Purchase price
2.8
224000
Total Incremental cost to buy
224000
The company should continue to Make the Part based on the above analysis
Incremental cost to make 80000 Units
Relevant amount per Unit
Relevant Fixed costs
Total relevant costs
Variable Costs
1.7
136000
Fixed Manufacturing Overheads
80000
80000
Total Incremental cost to Make
216000
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