g Gilberto Company currently manufactures 88,000 units per year of one of its crucial parts. Variable costs are $3.10 per unit, fixed costs related to making this part are $98,000 per year, and allocated fixed costs are $85,000 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 $4.30 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 88,000 and buying 88,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier

Total incremental cost of Making = $370,800 and Buying = $378,400.

Decision : The company should continue to manufacture the part instead of  buying the part from the outside supplier

Explanation:

Analysis of the Buy or Decision

                                                                      Buy       Make     Difference

Costs :

Purchase Price ( $4.30 × 88,000 units)  $378,400     $ 0      ($378,400)

Savings :

Variable Costs ($3.10 × 88,000 units )        $0      $272,800   $272,800

Fixed Cost                                                     $0       $98,000      $98,000

Total                                                         $378,400 $370,800     ($7,600)

Note that, Allocated fixed costs are unavoidable whether the company makes or buys the part thus not relevant for this decision.

Conclusion :

It can be seen that it is quite expensive to buy the part from the outside supplier, so continue making the part internally

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