ACCT 2302 Ch 23 Relevant Costing for Managerial Decisions Homework

Ch 23: Relevant Costing for Managerial Decisions Homework 1 1. Gilberto Company currently manufactures 68,000 units per year of one of its crucial parts. Variable costs are $2.10 per unit, fixed costs related to making this part are $78,000 per year, and allocated fixed costs are $65,000 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 $3.35 per unit guaranteed for a three-year period. Calculate the total incremental cost of making 68,000 and buying 68,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Ch 23: Relevant Costing for Managerial Decisions Homework 2 Explanation Make Buy Variable costs (68,000 @ $2.10) $142,800 Incremental fixed costs 78,000 Cost to buy (68,000 @ $3.35) $227,800 Total $220,800 $227,800 Recommendation: Note that the allocated fixed costs of $65,000 are not relevant to this managerial decision because they will continue whether the part is made or bought. Therefore, the incremental costs of making the part are $7,000 less per year than buying it. The company should continue to make this part. Note: We should recognize that this decision depends on the alternative uses for the productive facilities dedic