Question

Do It! Review 21-3 Wilma Company must decide whether to make or buy some of its components. The costs of producing 62,500 switches for its generators are as follows. Direct materials $29,700 Variable overhead $45,400 Direct labor$29,675 Fixed overhead $79,600 Instead of making the switches at an average cost of $2.95 ($184,37562,500), the company has an opportunity to buy the switches at $2.67 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated Prepare an incremental analysis showing whether the company should buy the switches. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g Net Income Increase (Decrease) Make Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost Wilma Company will incur $ of additional costs if it the switches.

Answer 1

	Make	Buy	Net income increase(decrease)
Direct materials	29700		29700
Direct labor	29675		29675
Variable manufacturing costs	45400		45400
Fixed manufacturing costs	79600	59700	19900
Purchase price		166875	-166875
Total cost	184375	226575	-42200
Wilma company will incur $42200 of additional costs if it buys the switches