Gelb Company currently manufactures 51,500 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 $65,000 per year, and allocated fixed costs are $78,500 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 $3.90 per unit. Calculate the total incremental cost of making 51,500 units and buying 51,500 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

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Dryomys Dryomys · Answer 1 · 2019-12-12T07:05:30+01:00

Answer:

$343,725; $200,850

Explanation:

(a) The total incremental cost of making 51,500 units is calculated as below:

Total Relevant Costs:

= Variable Cost Per Unit + Fixed Manufacturing Costs

= (Relevant Amount Per Unit × No. of units) + Fixed Manufacturing Costs

= ($5.15 × 51,500) + $78,500

= $265,225 + $78,500

= $343,725

Therefore, the total incremental cost of making 51,500 units is $343,725.

(b) The total incremental cost of buying 51,500 units is determined as below:

Total Relevant Costs = Purchase Price Per Unit × No. of units

= $3.90 × 51,500

= $200,850

Therefore, the total incremental cost of buying 51,500 units is $200,850.

(c) The company should buy the component from outside supplier as it results in a lower total incremental cost of $200,850.