Question

Janna Parts Company manufactured 500 injectors that are used in its lawn mower engines and incurred the following costs:

​Direct materials​$  50,000

​Direct labour​19,000

​Variable manufacturing overhead​30,000

​Fixed manufacturing overhead​   20,000

​​$119,000

A supplier has offered to sell the injectors to Janna Parts Co. for $200 each. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the gears were purchased from the outside firm. If the gears are purchased from the supplier, Janna has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $3,000.

Instructions

Prepare an incremental analysis report for Janna Parts Company which can serve as informational input into this make-or-buy decision.

Answer 1

Incremental Analysis
	Make	Buy	Net Income Increase (or decrease)
Direct material	50,000		50,000
Direct labor	19,000		19,000
Variable manufacturing overhead	30,000		30,000
Fixed manufacturing overhead	20,000	20,000	0
Purchase cost		100,000	(100,000)
Contribution Margin from another product		(3,000)	3,000
Total cost	119,000	117,000	2,000
Hence, should be bought