Question

Wilma Company must decide whether to make or buy some of its components. The costs of producing 64,200 switches for its generators are as follows.

Direct materials		$29,600		Variable overhead		$44,100
Direct labor		$33,932		Fixed overhead		$82,400

Instead of making the switches at an average cost of $2.96 ($190,032 ÷ 64,200), the company has an opportunity to buy the switches at $2.67 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.

(a)

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		$		$		$

Wilma Company will incur $  of additional costs if it                                                                       buysmakes the switches.

Answer 1

(a)

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		$29600		$		$29600
Direct labor		33932				33932
Variable manufacturing costs		44100				44100
Fixed manufacturing costs		82400		61800		20600
Purchase price				171414		-171414
Total cost		$190032		$233214		-43182

Wilma Company will incur $43182 of additional costs if it buys the switches.