Question

Gilberto Company currently manufactures 50,000 units per year of one of its crucial parts. Variable costs are $2.40 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $55,000 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 $3.60 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 50,000 and buying 50,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier

Answer 1

Total incremental cost of buying $10,000

Gilberto Company should continue to manufacture the product itself as this would help it save $10,000 fro every 50,000 units produced

Step-by-step explanation:

The relevant costs for this decision included the following

1. Total variable cost
2. Variable cost of external purchase
3. Savings in direct fixed cost

Unit Variable cost= $2.40

Total variable cost : $

($2.40×50,000) = 120,000

Variable cost of external purchase

($3.60×50,000)= 180,000

Extra-variable cost of external purchase 60,000

Savings in fixed cost (50,000)

Total incremental cost of buying 10,000

Total incremental cost of buying $10,000

Gilberto Company should continue to manufacture the product itself as this would help it save $10,000 fro every 50,000 units produced