Question

1. Wilma Company must decide whether to make or buy some of its components. The costs of producing $ 63,000 switches for its

generators are as follows:

Direct Materials------ $ 29300

Variable Overhead-------- $ 44200

Direct Labor--------- $ 30,634

Fixed Overhead--------- $ 82800

Instead of making the switches at an average costs of $ 2.93 ( $ 186,934/ 63, 800), 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 fixed costs will be eliminated.

Prepare and incremental analysis showing whether the company should make or buy switches.

Make Buy Net Income/ increase/loss

Direct Material $_________ ______ ___________________

Direct Labor

Variable Manufacturing costs

Fixed Manufacturing costs

Fixed Manufacturing costs

Purchase Price

Total Cost

Wilma Company will incurs $ _____ of additional cost if it ---------- the switches.

Answer 1

Answer)

Statement showing incremental Costs of making over buying

Particulars	Make (In $)	Buy (in $)	Incremental Cost (In $)
Direct Material	29,300	-	29,300
Variable Overheads	44,200	-	44,200
Direct Labor	30,634	-	30,634
Fixed Overhead	82,800	62,100	20,700
Purchase Price ($ 2.74 per unit X 63,800 units)	-	174,812	(174,812)
Total Cost	186,934.00	236,912.00	(49,978.00)

Decision: Since the incremental cost to Make over Buy is ($ 49,978), it implies that if the company decides to make the component in house, it will have additional cost savings of $ 49,978. Thus the company should manufacture the component in house.

Fixed Cost Applicable if the company decides to Buy the component.

Applicable Fixed cost = Total Fixed cost – Savings in Fixed cost

                                       = $ 82,800 – ($ 82,800 X ¼)

                                       = $ 62,100.