Question

Gelb Company currently manufactures 49,000 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 $89,000 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 $3.50 per unit. Calculate the total incremental cost of making 49,000 units and buying 49,000 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 component, income will increase by $223,750.

Step-by-step explanation:

Giving the following information:

Units= 49,000

Variable costs are $6.25 per unit

Fixed costs= $89,000 per year

The company is considering buying this component from a supplier for $3.50 per unit.

We will take into account only the differential costs.

Make:

Total cost= 49,000*6.25 + 89,000= $395,250

Buy:

Total cost= 49,000*3.5= $171,500

From the beginning, we knew that the cost of buying was cheaper than the unitary variable cost of making the part.

If the company buys the component, income will increase by $223,750.