Question

Do It! Review 7-3

Wilma Company must decide whether to make or buy some of its components. The costs of producing 60,000 switches for its generators are as follows.

Direct materials		$29,000		Variable overhead		$44,000
Direct labor		$25,000		Fixed overhead		$76,000

Instead of making the switches at an average cost of $2.90 ($174,000 ÷ 60,000), the company has an opportunity to buy the switches at $2.65 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.

Would your answer be different if the released productive capacity will generate additional income of $45,500? (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)
Total Cost		$		$		$
Opportunity cost
Total cost		$		$		$

YesNo

, the answer is

differentsame

. The analysis shows that net income will be

decreasedincreased

by $ .

Answer 1

Total cost to Make and Buy
			Make	Buy
Direct material		29000	0
Direct labour		25000	0
Variable overheads		44000	0
Fixed overheads		76000	57000
Cost of Purchase		0	159000
Total cost			174000	216000
Differential analysis
			Make	Buy	Increase (Decrease)
Total Cost		174000	216000	-42000
Opportunity cost		45500	0	45500
Total costt		219500	216000	3500
Yes, the answer is different
The Net Income will increase by $ 3500