Question

Santos Company currently manufactures one of its crucial parts at a cost of $3.20 per unit. This cost is based on a normal production rate of 70,000 units per year. Variable costs are $1.70 per unit, fixed costs related to making this part are $70,000 per year, and allocated fixed costs are $35,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Santos is considering buying the part from a supplier for a quoted price of $2.90 per unit guaranteed for a three-year period.

  

Calculate the total incremental cost of making 70,000 units. (Omit the "$" sign in your response.)

  

Total incremental cost

$

  

Calculate the total incremental cost of buying 70,000 units. (Omit the "$" sign in your response.)

  

Total incremental cost

$

  

Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

	Make
	Buy

Answer 1

Total incremental cost of making 70,000 units
Variable cost	=70000*1.7	1,19,000.00
Fixed Cost Allocated		35,000.00
Additional Fixed cost		70,000.00
Total cost for making 70,000 units		2,24,000.00
Total incremental cost of buying 70,000 units
Cost of buying	=70000*2.9	2,03,000.00
Fixed Cost Allocated		35,000.00
Total cost for Buying 70,000 units		2,38,000.00
The company should manufacture the part since the total cost of Manufacturing the part is less then the total cost of buying the Product.
Note-
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