Question

Gelb Company currently manufactures 52,000 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 $77,000 per year, and allocated fixed costs are $65,500 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 $3.70 per unit.

Required:
1. Calculate the total incremental cost of making 52,000 and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

Answer 1

It is more convenient to buy the component.

Step-by-step explanation:

Giving the following information:

Gelb Company currently manufactures 52,000 units per year as a key component for its manufacturing process.

Variable costs are $5.15 per unit.

The fixed costs related to making this component are $77,000.

The company is considering buying this component from a supplier for $3.70 per unit.

Because the allocated fixed costs are unavoidable, we will not have them into account to make the decision.

Make in house= 5.15*52,000 + 77,000= $344,800

Buy= 3.70*52,000= $192,400

It is more convenient to buy the component.