Gilberto Company currently manufactures 40,000 units per year of one of its crucial parts. Variable costs are $1.60 per unit, fixed costs related to making this part are $40,000 per year, and allocated fixed costs are $30,000 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 $2.70 per unit guaranteed for a three-year period.
Required:
a. Calculate the total incremental cost of making 40,000 and buying 40,000 units. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?