Question

Cheyenne Company must decide whether to make or buy some of its components. The costs of producing 60,200 switches for its generators are as follows.

Direct materials		$29,900		Variable overhead		$45,700
Direct labor		$25,990		Fixed overhead		$76,000

Instead of making the switches at an average cost of $2.95 ($177,590 ÷ 60,200), the company has an opportunity to buy the switches at $2.67 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.

What is the minimum selling price on the special order to produce net income of $5.08 per ball? (Round answer to 2 decimal places, e.g. 15.25.)

Minimum selling pric

Answer 1

MAKE (A) BUY(B) NET INCOME (A - B)

Increase (Decrease)

1.Direct Materials $29,900 0 $29,900

2.Direct Labour $25,990 0 $25,990

3.Variable Manufacturing costs $45,700 0 $45,700

(all variable cost will be eliminated)   

4.Fixed Manufacturing costs    $76,000 $57,000 $19,000

(76,000-19,000 will be eliminated)

5.Purchase price 0    $160,734 ($160,734)

(60,200 units* $2.67)units

6.Total cost (1+2+3+4+5) $177,590 $217,734 ( $40,144)   

Cheyenne Company should make it because the cost is less than when they buy it. If they buy it, the cost will incur $40,144.