Gilberto Company currently manufactures 60,000 units per year of one of its cruc

Question

Gilberto Company currently manufactures 60,000 units per year of one of its crucial parts. Variable costs are $1.80 per unit, fixed costs related to making this part are $60,000 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 $3.00 per unit guaranteed for a three-year period.

Calculate the total incremental cost of making 60,000 and buying 60,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Costs to Make

Costs to Buy

Outside Supplier

Calculate the total incremental cost of making 60,000 units. (Round 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 $0

Explanation / Answer

Incremental Costs to Make:

So, Total Incremental Costs to Make = 108000 + 60000 = 168000

Incremental Costs to Buy:

There is no relevant fixed costs in this case. The allocated fixed cost is not relevant if company is buying it.

So, Total incremental costs to Buy = 180000

As, incremental cost to make is less than incremental cost to buy, company should continue to manufacture the part.

Relevant Amount per Unit Relevant Fixed Costs Total Relevant Costs Variable Cost per Unit 1.80 60000 * 1.80 = 108000 Fixed Cost 60000 60000

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