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26 June, 12:39

Gelb Company currently manufactures 43,000 units per year of a key component for its manufacturing process. Variable costs are $2.95 per unit, fixed costs related to making this component are $73,000 per year, and allocated fixed costs are $77,500 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. Calculate the total incremental cost of making 43,000 units and buying 43,000 units. Should it continue to manufacture the component, or should it buy this component from the outside supplier

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  1. 26 June, 13:47
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    It is cheaper to buy the component. At this level of production by $40,750.

    Explanation:

    Giving the following information:

    Production = 43,000 units

    Variable costs are $2.95 per unit

    Avoidable Fixed costs = $73,000 per year

    Unavoidable fixed costs = $77,500 per year.

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

    We need to calculate the cost of producing and buying and choose the best option.

    Production:

    Total cost = 43,000*2.95 + 73,000 = $199,850

    Buy:

    Total cost = 43,000*3.7 = $159,100

    It is cheaper to buy the component. At this level of production by $40,750.
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