Question

Wilma Company must decide whether to make or buy some of its components. The costs of producing 63,800 switches for its generators are as follows. Direct materials $29,300 Variable overhead $44,200 Direct labor $30,634 Fixed overhead $82,800 Instead of making the switches at an average cost of $2.93 ($186,934 ÷ 63,800), the company has an opportunity to buy the switches at $2.74 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 make or buy the switches. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials $ $ $ Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost $ $ $ Would your answer be different if the released productive capacity will generate additional income of $53,668? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Total Cost $ $ $ Opportunity cost Total cost $ $ $

Answer 1

Answer -

			Make	Buy	increase(decrease)
Direct Materials		29,300	0	29300
Direct labor		30,634	0	30,634
Variable manufacturing costs	44200	0	44200
Fixed manufacturing costs	82800	62,100	20,700
purchase price		0	174,812	-174,812
Total cost		186,934	236,912	-49,978
cimpany will incur $39,750 additional cost if it purchases switches
incremental analysis
			Make	buy	net income
total cost		186,934	236,912	-49,978
opportunity cost		53,668		53,668
total cost		240,602	236,912	3690
yes the answer is different the analysis shows that net income will increase by 3690

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