Question

Gilberto Company currently manufactures 80,000 units per year of one of its crucial parts. Variable costs are $1.50 per unit, fixed costs related to making this part are $80,000 per year, and allocated fixed costs are $40,000 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 $3.30 per unit guaranteed for a three-year period.

Calculate the total incremental cost of making 80,000 and buying 80,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

need help with the Cost to make, Cost to Buy, Thanks

Answer 1

Gilberto Company currently manufactures 80,000 units per year

1)

cost to make 80,000 units

	Relevant Amount per Unit	Relevant Fixed Cost	Total Relevant Cost
Variable Cost per Unit (80,000*1.5)	1.5		120000
Fixed Manufacturing Overhead		80,000	80,000
Total Incremental Cost to Make			200,000

Incremental cost to make 80,000 units =$200,000

Note: here we should only consider variable fixed cost and fixed costs related to making this part are and we should not consider the Allocated fixed costs that are unavoidable whether the company makes or buys the part.

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2)

cost to buy 80,000 units

Incremental Cost to Buy - 80000 Units
	Relevant Amount per Unit	Relevant Fixed Cost	Total Relevant Cost
Purchase Price Per Unit (3.3*80,000)	3.3		264000
Total Incremental Cost to Buy			264000

cost to buy 80,000 units =$264,000

Conclusion :

Company should make a product because its cost is less then buying cost