Question

Question 2

Wilma Company must decide whether to make or buy some of its components. The costs of producing 68,300 switches for its generators are as follows.

Direct materials		$29,400		Variable overhead		$45,700
Direct labor		$42,336		Fixed overhead		$82,000

Instead of making the switches at an average cost of $2.92 ($199,436 ÷ 68,300), the company has an opportunity to buy the switches at $2.66 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 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

buys/makes

the switches.

Answer 1

	Make	Buy	Net income increase (Decrease)
Direct material	29,400	0	29,400
Direct labor	42,336	0	42,336
variable overhead	45,700	0	45,700
Fixed overhead	82,000	61,500	20,500
purchase price	0	181,678	-181,678
Total cost	$199,436	$243,178	-$43,742

Outside supplier's price = $2.66 per unit

Number of unit purchased = 68,300

Hence, purchase price = Outside supplier's price x Number of unit purchased

= 2.66 x 68,300

= $181,678

If switches are bought from outside supplier, fixed overhead will decrease by 1/4

Hence, fixed overhead, if switches are bought from the outside supplier = 82,000 - 82,000 x 1/4

= 82,000 - 20,500

= $61,500

Wilma Company will incur $43,742 of additional costs if it buys the switches.