Gelb Company currently manufactures 42,500 units per year of a key component for

Question

Gelb Company currently manufactures 42,500 units per year of a key component for its manufacturing process. Variable costs are $4.05 per unit, fixed costs related to making this component are $79,000 per year, and allocated fixed costs are $73,500 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 42,500 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 incremental cost of buying 42,500 units. (Round "purchase price per unit" answer to 2 decimal places.) Incremental Costs to Buy Relevant Relevant Amount per Fixed Costs Total Relevant Costs Total incremental cost to buy Should it continue to manufacture the component, or should it buy this component from the outside supplier? Buy Make 0

Explanation / Answer

a) Calculate total incremental cost of making units :

b) Calculate total incremental cost of buying units :

Company should Buy the component from the outside supplier.

Incremental cost to make Relevant amount per unit Relevant fixed cost Total relevant cost Variable cost per unit 4.05 172125 Fixed cost 79000 79000 Total relevant cost 251125

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