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6 April, 21:45

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.

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  1. 6 April, 22:09
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    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
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