Question

xercise 23-5 Make or buy LO A1

Gelb Company currently manufactures 41,500 units per year of a key component for its manufacturing process. Variable costs are $5.15 per unit, fixed costs related to making this component are $79,000 per year, and allocated fixed costs are $80,500 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 $3.70 per unit.

Calculate the total incremental cost of making 41,500 and buying 41,500 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.)

Calculate the total incremental cost of making 41,500 units. (Round "variable cost per unit" answer to 2 decimal places.)

Incremental Costs to Make
	Relevant Amount per Unit	Relevant Fixed Costs	Total Relevant Costs
Total incremental cost to make

Calculate the total incremental cost of making 41,500 units. (Round "variable cost per unit" answer to 2 decimal places.)

Incremental Costs to Buy
	Relevant Amount per Unit	Relevant Fixed Costs	Total Relevant Costs
Total incremental cost to buy

Should it continue to manufacture the component, or should it buy this component from the outside supplier?

Should Gelb make the part or purchase it from the outside supplier?

Answer 1

SOLUTION

Incremental cost to make-

	Relevant amount per unit ($)	Relevant fixed costs ($)	Total relevant costs ($)
Variable costs (41,500 * $5.15)	213,725		213,725
Incremental fixed costs		79,000	79,000
Total incremental cost to make			292,725

Incremental cost to buy-

	Relevant amount per unit ($)	Relevant fixed costs ($)	Total relevant costs ($)
Purchase price (41,500 * $3.70)	153,550		153,550
Total incremental cost to buy			153,550

Gelb should buy the 41,500 units, as the incremental cost is less than making by $139,175 ($292,725 - $153,550)