Question

Prepare a make vs. buy incremental analysis for each possible course of action in an Excel worksheet. Your
grade will be based on the correctness of your answers, as well as the use of Excel. That is, where possible,
you should use formulas to get your answers, rather than keyed-in values. See your instructor for help with
Excel basics if you need it.

	Below is cost data for Zoom's production of wheels, seats, and calipers. Outside suppliers have offered to
	provide wheels for $7.33, seats for $7.83, and calipers for $2.53 per piece. Both wheels and seats are branded
	with the Zoom logo, and that logo will need to be added at the Zoom factory at a cost of $0.50 each for any
	of these components that are outsourced. For all three components, 75% of the fixed costs are avoidable, and
	will be eliminated if the component's production is outsourced. In addition, seats and calipers are both
	produced out of the same small factory space. If both seats and calipers were outsourced, Zoom could lease
	the space out and increase net income by $18,000 per year, while eliminating all fixed costs for the two
	components.
			Wheels	Seats	Calipers
		Cost category
		Direct materials	$141,500	$54,000	$89,000
		Direct labor	93,500	72,000	43,000
		Variable overhead	21,000	14,000	16,000
		Fixed overhead	61,000	40,800	30,800
		Total cost	$317,000	$180,800	$178,800
		Units produced	40,000	20,000	80,000
		Cost per unit	$7.93	$9.04	$2.24

Answer 1

Answer:

STATEMENT OF INCREMENTAL ANALYSIS FOR WHEEL Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (40,000 $7.33) $ 293,200 $ (293,200) Logo cost (40,000 x $0.50) $ 20,000 $ (20,000) Direct materials $ 141,500 141,500 Direct labour $ 93,500 $ 93,500 Variable overhead 21,000 $ 21,000 Fixed overhead 61,000 $ 15,250 $ 45,750 Total cost $ 317,000 $ 328,450 $ (11,450) $ $

Comment: As there is reduction of $11,450 in net income, it is not advisable to buy the wheel component from outside.

STATEMENT OF INCREMENTAL ANALYSIS FOR SEATS Make Wheel Buy Wheel $7.83) 156,600 10,000 Outsourcing buy cost (20,000 Logo cost (20,000 $0.50) Direct materials Direct labour Variable overhead Fixed overhead Total cost Net income increase/ (decrease) $ (156,600) $ (10,000) 54,000 $ 72,000 14,000 30,600 $ 4,000 54000 72000 14000 40800 $ 180,800 $ $ 10,200 176,800

Comment: Seat component may be bought from outside as there is incremental revenue of $4,000.

STATEMENT OF INCREMENTAL ANALYSIS FOR CALIPERS Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (80,000 $2.53) $ 202,400 $ (202,400) Direct materials 89000 $ 89,000 Direct labour 43000 $ 43,000 Variable overhead 16000 $ 16,000 Fixed overhead 30800 $ 7,700 $ 23,100 Total cost $ 178,800 $ 210,100 $ (31,300)

Comment: It is not advisable at all to buy clipers component from outside as there is huge loss of revenue.

STATEMENT OF INCREMENTAL ANALYSIS FOR BOTH SEATS & CALIPERS Net income Make seats Buy seats increase/ & calipers & calipers (decrease) Outsourcing buy cost $ 359,000 $ (359,000) Logo cost $ 10,000 $ (10,000) Direct materials $ 143,000 143,000 Direct labour $ 115,000 115,000 Variable overhead $ 30,000 $ 30,000 Fixed overhead 71,600 71,600 Lease revenue 18,000 Total cost $ 359,600 $ 369,000 $ 8,600 7

Comment: As there is incremental net income of $8,600, both the seats and clipers component may be brought from outside.

STATEMENT OF INCREMENTAL ANALYSIS FOR WHEEL Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (40,000 $7.33) $ 293,200 $ (293,200) Logo cost (40,000 x $0.50) $ 20,000 $ (20,000) Direct materials $ 141,500 141,500 Direct labour $ 93,500 $ 93,500 Variable overhead 21,000 $ 21,000 Fixed overhead 61,000 $ 15,250 $ 45,750 Total cost $ 317,000 $ 328,450 $ (11,450) $ $

STATEMENT OF INCREMENTAL ANALYSIS FOR SEATS Make Wheel Buy Wheel $7.83) 156,600 10,000 Outsourcing buy cost (20,000 Logo cost (20,000 $0.50) Direct materials Direct labour Variable overhead Fixed overhead Total cost Net income increase/ (decrease) $ (156,600) $ (10,000) 54,000 $ 72,000 14,000 30,600 $ 4,000 54000 72000 14000 40800 $ 180,800 $ $ 10,200 176,800

STATEMENT OF INCREMENTAL ANALYSIS FOR CALIPERS Net income Make Buy increase/ Wheel Wheel (decrease) Outsourcing buy cost (80,000 $2.53) $ 202,400 $ (202,400) Direct materials 89000 $ 89,000 Direct labour 43000 $ 43,000 Variable overhead 16000 $ 16,000 Fixed overhead 30800 $ 7,700 $ 23,100 Total cost $ 178,800 $ 210,100 $ (31,300)

STATEMENT OF INCREMENTAL ANALYSIS FOR BOTH SEATS & CALIPERS Net income Make seats Buy seats increase/ & calipers & calipers (decrease) Outsourcing buy cost $ 359,000 $ (359,000) Logo cost $ 10,000 $ (10,000) Direct materials $ 143,000 143,000 Direct labour $ 115,000 115,000 Variable overhead $ 30,000 $ 30,000 Fixed overhead 71,600 71,600 Lease revenue 18,000 Total cost $ 359,600 $ 369,000 $ 8,600 7