Question

Question 1: (8 marks) (B1, C1) Ahlia Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs Direct materials $35,000 Direct labor15,000 Variable manufacturing overhead 10,000 Fixed manufacturing overhead 20,000 $80,000 Another company has offered to sell the same component part to the company for $13 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Ahlia Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $22,000. :Instructions Prepare an incremental analysis report for Ahlia Company which can serve as informational input into this make or buy decision.

Answer 1

	Manufactured	Purchased
Cost of component	$             80,000	$        78,000
Add - Fixed Cost to remain		$        20,000
Total Cost	$             80,000	$        98,000
Less - Additional Contribution		$     (22,000)
Net Cost	$             80,000	$        76,000

The company will be saving net of $ 4,000 if the component is purchased from outside.