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Question: Wilma Company must decide whether to make or buy some of its components. The costs of producing 6...

Wilma Company must decide whether to make or buy some of its components. The costs of producing 65,900 switches for its generators are as follows.

Direct materials $31,000 Variable overhead $44,800 Direct labor $37,028 Fixed overhead $79,600

Instead of making the switches at an average cost of $2.92 ($192,428 ÷ 65,900), the company has an opportunity to buy the switches at $2.75 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. (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 $52,747

	Make	Buy	Net Income Increase/Decrease
Total Cost
Oppurtunity Cost
Total Cost

Answer 1

(i)

	Make	Buy	Net Income Increase/Decrease
Direct Materials	31,000	0	31,000
Direct Labor	37,028	0	37,028
Variable Manufacturing Costs	44,800	0	44,800
Fixed Manufacturing Costs	79,600	79,600 x 3/4 = 59,700	19,900
Purchase Price	0	65,900 x 2.75 = 181,225	- 181,225
Total Cost	192,428	240,925	- $48,497

The company should not buy the switches since cost of buying is more than cost of making switches

(ii)

	Make	Buy	Net Income Increase/Decrease
Total Cost	192,428	240,925	- 48,497
Oppurtunity Cost	52,747	0	52,747
Total Cost	245,175	240,925	4,250

The company should buy the switches since cost of buying is less than cost of making switches.

Kindly comment if you need further assistance. Thanks