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.

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.

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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 $ .

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Answer 1

1
	Make	Buy	Net income increase(decrease)
Direct materials	29000	0	29000
Direct labor	25000	0	25000
Variable manufacturing costs	44000	0	44000
Fixed manufacturing costs	76000	57000	19000
Purchase price	0	159000	-159000
Total cost	174000	216000	-42000
Wilma company will incur $42000 of additional costs if it buys the switches
2
	Make	Buy	Net income increase(decrease)
Total cost	174000	216000	-42000
Opportunity cost	45500	0	45500
Total annual cost	219500	216000	3500
Yes, the answer is different. The analysis shows that net income will be increased by $3500