Question

Gelb Company currently manufactures 40,000 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 $73,000 per year, and allocated fixed costs are $83,500 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 40,000 units and buying 40,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

Answer 1

Answer
Gelb Company
Ans. The company should buy the component from outside supplier as it results in a lower total incremental cost of $ 1,40,000
Working:
a. Costs to Make / manufacture the component
Particulars	Amount
Variable Cost (40,000 Units* $6.25 per unit)	$2,50,000
Fixed Manufacturing Costs (Given)	$73,000
Total Incremental Costs to Make	$ 3,23,000
b. Costs to Buy from the outside supplier
Particulars	Amount
Purchase Price = 40,000 units * ($3.50 buying Rate per unit)	$ 1,40,000
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