Question

Marigold Company must decide whether to make or buy some of its components. The costs of producing 60,200 switches for its generators are as follows.

Direct materials		$29,500		Variable overhead		$45,600
Direct labor		$25,900		Fixed overhead		$79,600

Instead of making the switches at an average cost of $3.00 ($180,600 ÷ 60,200), 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. (If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Make Buy Net Income Increase (Decrease)

Direct Materials 29500 0 29500

Direct Labor 25900 0 25900

Variable Manufacturing Costs 45600 0 45600

Fixed Manufacturing Costs 79600 59700 19900

Purchase Price 0 _____ _______

Total Cost 180600 ______ _______

Marigold Company will incur $____________ of additional costs if it buys the switches.

Make Buy Net Income Increase (Decrease)

Total Cost 180600 ______ _____________________

Oppurotunity Cost _____ 0 _________________

Total Cost ______ ______ _________________

Yes the answer is different. The anaylsis shows that the net income will be increased by$________.

Answer 1

Solution a:

Marigold Company will incur $44,048 of additional costs if it buys the switches.

Note:

Solution b cannot be solved as income from released capacity is missing in question.