Question

Gilberto Company currently manufactures 65,000 units per year of one of its crucial parts. Variable costs are $1.95 per unit, fixed costs related to making this part are $75,000 per year, and allocated fixed costs are $62,000 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 $3.25 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 65,000 units. Incremental Costs to Make Relevant Relevant Total Amount per Fixed Costs Relevant Costs Unit Variable cost per unit $65,000.00 126,750 Fixed manufacturing costs Allocated fixed costs Total incremental cost to make 126,750

Answer 1

Step-by-step explanation:

cost of making in-house

Variable cost = 1.95 * 65,000 = 126,750

Related fixed cost = 75,000

Unavoidable fixed cost= 62,000

Total cost of manufacturing = 263,750.

cost of buying

Unit cost = 3.25*65,000 = 211,250

Unavoidable fixed cost = 62,000

Total cost of buying = 273,250 .

Cost of buying is higher than the cost of making

Incremental cost buying = 273,250-263,250 = 9,500

Recommendation

Gilberto should manufacture in - house instead of buying.