connect 25-4

Gilberto Company currently manufactures one of its crucial parts at a cost of $4.50 per unit. This cost is based on a normal production rate of 50,000 units per year. Variable costs are $2.50 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $50,000 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 $3.70 per unit guaranteed for a three-year period.

Calculate the total incremental cost of making 50,000 units.