Gilberto Company currently manufactures 60,000 units per year of one of its crucial parts. Variable costs are $2.30 per unit, fixed costs related to making this part are $60,000 per year, and allocated fixed costs are $45,000 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 $3.50 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 60,000 and buying 60,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

the costs of producing the parts is $12,000 less than buying them from an outside vendor

Explanation:

production costs (60,000 units)

variable $2.30 per unit

fixed (avoidable) $1 per unit

fixed (unavoidable) $0.75 per unit

total $4.05 per unit

price from outside supplier $3.50 per unit

total incremental cost of buying from outside supplier = (60,000 x $3.50) + (60,000 x $0.75) = $210,000 + $45,000 = $255,000

production costs to manufacture = 60,000 x $4.05 = $243,000

the costs of producing the parts is $12,000 less than buying them from an outside vendor

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