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Skyhigh Motors manufactures flying cars. Currently, Skyhigh manufactures its own hovercraft component which goes into each...

Skyhigh Motors manufactures flying cars. Currently, Skyhigh manufactures its own hovercraft component which goes into each flying vehicle. However, Skyhigh is now considering purchasing the hovercraft component from a supplier. The current cost of production for each hovercraft component is $97,300, which consists of $48,500 of direct materials, $29,150 of direct labor, $11,500 of variable overhead, and $8,150 of fixed overhead. The company can purchase the component from the supplier for $83,499. Assume 2,500 components are produced. 1) Should Skyhigh continue to make the component? 2) What is the difference in incremental cost between buying and purchasing?

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Answer #1
make or buy
1)
cost of make buy save
material 48500
labour 29150
variable overhead 11500
89150 83499 5651
fixed cost 8150 not considered as its not relavent
skyhigh motor should source this part as its cheaper to buy than make as shown above
2) incremental cost qty
2500
89150 83499 5651
saving         1,41,27,500
incremental cost refers to thee difference in total relevant cost between two alternatives
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