Question

Wilma 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 $29,500 Variable overhead $45,600 

Direct labor $25,900 Fixed overhead $79,600 

Instead of making the switches at an average cost of $3.00 ($180,600 = 60,200), the company has an opportunity to buy the switches at $2.74 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. 

Would your answer be different if the released productive capacity will generate additional income of $48,198?

Answer 1

1
	Make	Buy	Net income increase(decrease)
Direct materials	29500		29500
Direct labor	25900		25900
Variable manufacturing costs	45600		45600
Fixed manufacturing costs	79600	59700	19900
Purchase price		164948	-164948
Total cost	180600	224648	-44048
2
Wilma company will incur $44048 of additional costs if it buys the switches.
3
	Make	Buy	Net income increase(decrease)
Total cost	180600	224648	-44048
Opportunity cost	48198	0	48198
Total cost	228798	224648	4150
Yes, the answer is different. The analysis shows that net income will be increased by $4150