Question

Exercise 23-2 Make or buy LO P1 Gelb Company currently manufactures 43,000 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 $73,000 per year, and allocated fixed costs are $78,500 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. Calculate the total incremental cost of making 43,000 units and buying 43,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier

Answer 1

If the company buys the units, it will save $135,350.

Step-by-step explanation:

Giving the following information:

Number of units= 43,000

Make in-house:

Variable costs are $5.15 per unit

Avoidable fixed costs= $73,000

Buy:

Unitary cost= $3.7

We will take into account only the incremental cost, therefore, the unavoidable fixed costs will not be taken into account.

Total cost of production= 43,000*5.15 + 73,000= $294,450

Total cost of purchase= 3.7*43,000= $159,100

If the company buys the units, it will save $135,350.