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13 May, 17:51

Gilberto Company currently manufactures 40,000 units per year of one of its crucial parts. Variable costs are $1.60 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $30,000 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 $2.70 per unit guaranteed for a three-year period.

Required:

a. Calculate the total incremental cost of making 40,000 and buying 40,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

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  1. 13 May, 20:44
    0
    It is cheaper to make the part. In three years the company will save $12,000.

    Explanation:

    Giving the following information:

    Units = 40,000

    Variable costs = $1.60 per unit

    Fixed costs = $40,000 per year

    Gilberto is considering buying the part from a supplier for a quoted price of $2.70 per unit guaranteed for three years.

    We need to calculate the total cost of making and buying the part.

    Make in-house:

    Total cost = 1.6*40,000 + 40,000 = $104,000

    Buy:

    Total cost = 40,000*2.7 = $108,000

    It is cheaper to make the part. In three years the company will save $12,000.
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