Question

Gelb Company currently manufactures 42,000 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 $87,000 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 42,000 units and buying 42,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

Answer 1

It is more convenient to buy the component.

Step-by-step explanation:

Giving the following information:

Production= 42,000 units

Variable costs are $6.25 per unit, fixed costs related to making this component are $87,000 per year

The company is considering buying this component from a supplier for $3.70 per unit.

We will take into account only the incremental costs.

Make in-house:

Total cost= 87,000 + 6.25*42,000

Total cost= $349,500

Buy:

Total cost= 3.7*42,000= $155,400

It is more convenient to buy the component.