Question

Gilberto Company currently manufactures 65,000 units per year of one of its crucial parts. Variable costs are $1.95 per unit, fixed costs related to making this part are $75,000 per year, and allocated fixed costs are $62,000 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 $3.25 per unit guaranteed for a three-year period.

Answer 1

It is more convenient to continue making the part in house.

Step-by-step explanation:

Giving the following information:

Gilberto Company currently manufactures 65,000 units per year of one of its crucial parts.

Variable costs are $1.95 per unit

Fixed costs= $75,000 per year

Allocated fixed costs= $62,000

Allocated fixed costs are unavoidable.

Gilberto is considering buying the part from a supplier for a quoted price of $3.25 per unit guaranteed for three years.

We need to determine whether it is more convenient to buy the parts or make them in house.

We will not have into account the allocated fixed costs because they are unavoidable.

Make in house:

Total cost= 65,000*1.95 + 75,000= $201,750

Buy:

Total cost= 65,000*3.25= $211,250

It is more convenient to continue making the part in house.