Question

Gilberto Company currently manufactures 70,000 units per year of one of its crucial parts. Variable costs are $1.80 per unit, fixed costs related to making this part are $70,000 per year, and allocated fixed costs are $35,000 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 $2.90 per unit guaranteed for a three-year period.

Calculate the total incremental cost of making 70,000 and buying 70,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Answer 1

The company should continue making the unit. It is cheaper than buying by $7,000.

Step-by-step explanation:

Giving the following information:

Variable costs are $1.80 per unit

fixed costs= $70,000 per year

Purchasing price per unit= $2.90

I will assume that the fixed costs (not allocated) are avoidable.

First, we need to calculate the total cost of making the unit:

Total cost= 70,000*1.8 + 70,000= $196,000

Buying:

Total cost= 70,000*2.9= $203,000

The company should continue making the unit. It is cheaper than buying by $7,000.