Question

Gelb Company currently manufactures 43,500 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 $73,000 per year, and allocated fixed costs are $71,500 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 43,500 and buying 43,500 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier? (Round "purchase price per unit" answer to 2 decimal places.)

Answer 1

Solution

Incremental cost of making

$         (192,625)

The company should not manufacture the component and should buy from outside.

Working

Differential Analysis
	Make	Buy
Variable cost of production	$     271,875.00
Avoidable Fixed overhead	$       73,000.00
Purchase price		$       152,250.00
Total relevant Cost	$     344,875.00	$       152,250.00

.

Total Cost of Buying	$           152,250
Total Cost of manufacturing	$           344,875
Incremental cost of making	$         (192,625)