Exercise 23-4 Make or buy decision LO A1 Gilberto Company currently manufactures 50,000 units per year of one of its crucial parts. Variable costs are $2.40 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $55,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.60 per unit guaranteed for a three-year period.

Complete Question

Exercise 23-4 Make or buy decision LO A1 Gilberto Company currently manufactures 50,000 units per year of one of its crucial parts. Variable costs are $2.40 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $55,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.60 per unit guaranteed for a three-year period

Calculate the incremental cost of making 50,000 units

Answer

Incremental costs $ 10,000

Explanation:

Relevant cost are future incremental cash cost that arise as a direct consequence of a decision.

The relevant costs of making the tires internally are

$

Variable cost of external purchase (($3.60 * 50,000) 180,000

Variable cost of making - ($2.40 * 50,000) (120,000)

Extra variable cost of making 60,000

Savings in Specific fixed cost (50,000

Incremental costs 10,000