Question

Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: direct materials, $32 per unit; direct labor, $10 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why?

a.buy, $275,000 more in profits b.buy, $75,000 more in profits c.make, $275,000 increase in profits d.make, $350,000 increase in profits

Answer 1

Differential Analysis
	Cost of Buying	Cost of making	Increase/Decrease in income
Direct materials cost	0	50,000 x 32 = 1,600,000	-1,600,000
Direct labor cost	0	50,000 x 10 = 500,000	-500,000
Variable factory overhead	0	50,000 x 16 = 800,000	-800,000
Fixed costs	0	75,000	-75,000
Outside supplier price	50,000 x 65 = 3,250,000	0	3,250,000
Total cost	$3,250,000	$2,975,000	$275,000

Net incremental advantage of making = $275,000

Correct option is c.