Question

Safe T Products manufactures electronic switches. Safe T Products is currently makin these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: Direct material $ 31,000 Direct labor 29,000 Manufacturing overhead 40,000 Total $100,000 Safe T Products can purchase the electronic switches from Specialty Products at a price of $82,000 for 100,000 units. The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Safe T Products. How much is Safe T Products' incremental cost or savings if the switches are bought instead of made? A) $6,000 incremental cost B) $18,000 incremental cost ob o C) $18,000 incremental savings to do D) $2,000 incremental savings pho t obooth

Answer 1

Answer: A) $6,000 incremental cost Explanation: Net Income Buy Make Increase (Decrease) $31,000 29,000 16,000 -82,000 -$6,000 Direct materials Direct labor Manufacturing overhead Purchase price $31,000 29,000 40,000 $0 0 24,000 82,000 $106,000 0 $100,000 Total cost Buy: Manufacturing overhead ($40,000- $16,000) = $24,000