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) <u>(120,000)</u>
Extra variable cost of making 60,000
Savings in Specific fixed cost <u>(50,000</u>
Incremental costs <u>10,000</u>
