Gelb Company currently manufactures 52,000 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 $77,000 per year, and allocated fixed costs are $65,500 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.

Required:

1. Calculate the total incremental cost of making 52,000 and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

Question

Business

Maria Gill

24 October, 01:36

Gelb Company currently manufactures 52,000 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 $77,000 per year, and allocated fixed costs are $65,500 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.

Required:

1. Calculate the total incremental cost of making 52,000 and buying 52,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier?

+4

Answers (1)

Know the Answer?

Alessandro Davila · Answer 1

It is more convenient to buy the component.

Explanation:

Giving the following information:

Gelb Company currently manufactures 52,000 units per year as a key component for its manufacturing process.

Variable costs are $5.15 per unit.

The fixed costs related to making this component are $77,000.

The company is considering buying this component from a supplier for $3.70 per unit.

Because the allocated fixed costs are unavoidable, we will not have them into account to make the decision.

Make in house = 5.15*52,000 + 77,000 = $344,800

Buy = 3.70*52,000 = $192,400

It is more convenient to buy the component.