Question

Gelb Company currently manufactures 47,000 units per year of a key component for its manufacturing process. Variable costs are $6.25 per unit, fixed costs related to making this component are $85,000 per year, and allocated fixed costs are $84,500 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 47,000 units and buying 47,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier

Answer 1

Gelb Company

1. The total incremental cost of making and buying 47,000 units is:

= $204,850.

2. Gelb should buy this component from the outside supplier. It is far cost-effective.

Step-by-step explanation:

a) Data and Calculations:

Required quantity of key component per year = 47,000 units

Variable costs per unit = $6.25

Avoidable fixed costs per year = $85,000

Unavoidable fixed costs per year = $84,500

Purchase price of component from outside supplier = $3.70 per unit

Incremental cost of making or buying the 47,000 units:

Make Buy Incremental Costs

Variable costs $293,750 $173,900 $119,850

Avoidable fixed costs 85,000 0 85,000

Total relevant costs $378,750 $173,900 $204,850