Question: Gilberto Company currently manufactures one of its crucial parts at
Gilberto Company currently manufactures one of its crucial parts at a cost of $ 4.45 per unit. This cost is based on a normal production rate of 65,000 units per year. Variable costs are $ 1.95 per unit, fixed costs related to making this part are $ 65,000 per year, and allocated fixed costs are $ 58,500 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 $ 3.50 per unit guaranteed for a three- year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.
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