A single-product company prepares income statements using both absorption and variable costing. Manufacturing overhead cost applied per unit produced in Year 2 was the same as in Year 1. The Year 2 variable-costing statement reported a profit, whereas the Year 2 absorption-costing statement reported a loss. A possible explanation for the difference in reported income is that the units produced in Year 2 were:
a. Fewer than units sold in Year 2.
b. Fewer than the activity level used for allocating overhead to the product.
c. Greater than the activity level used for allocating overhead to the product.
d. Greater than units sold in Year 2.
Gilberto Company currently manufactures one of its crucial parts at $5.15 per unit. This cost is based on a standard production rate of 40,000 units per year. Variable costs are $3.40 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 purchasing the part from a supplier for a quoted price of $3.20 per unit, guaranteed for three years.
a. Calculate the total incremental cost of making 40,000 units.
b. Calculate the total incremental cost of buying 40,000 units.
c. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?
