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