Question

Blossom Company must decide whether to make or buy some of its components. The costs of producing 65,700 switches for its generators are as follows. Direct materials $31,000 Direct labor $34,229 Variable overhead $45,900 Fixed overhead $84,000 Instead of making the switches at an average cost of $2.97 ($195,129 = 65,700), the company has an opportunity to buy the switches at $2.71 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 Blossom Company will incur $ of additional costs if it the switches

Answer 1

Answer:

(i)
	Make	Buy	Net Income Increase/Decrease
Direct Materials	31,000	0	31,000
Direct Labor	34,229	0	34,229
Variable Manufacturing Costs	45,900	0	45,900
Fixed Manufacturing Costs	84,000	84,000 x 3/4 = 63,000	21,000
Purchase Price	-	65,700 x 2.71 = 178,047	-1,78,047
Total Cost	1,95,129	2,41,047	-45,918
Blossom company will incur $ 45,918 of additional cost if it Buy    Switches.
(ii)
	Make	Buy	Net Income Increase/Decrease
Total Cost	1,95,129	2,41,047	-45,918
Opportunity Cost	50,128	0	50,128
Total Cost	2,45,257	2,41,047	4,210
Yes, The answer is buy the analysis shows the net income will increase by $4,210

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