Question

Question 40 Maplewood Company must decide whether to make or buy some of its components. The costs of producing 60,000 switches for its generators are as follows. Direct materials $30,000 Variable overhead $45,000 Direct labour 42,000 Fixed overhead 60,000 Instead of making the switches at an average cost of $2.95 ($177,000 ÷ 60,000), the company has an opportunity to buy the switches at $2.75 per unit. If the company purchases the switches, all the variable costs and one-third of the fixed costs will be eliminated.

(a) Prepare an incremental analysis showing whether the company should make or buy the switches. (Round per unit answers to 2 decimal places, e.g. 15.25. If an amount reduces the net income then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).) Per Unit Make Buy Net Income Increase (Decrease) Number of units: Manufacturing overheadTotal annual costCost of good soldPurchase priceVariable manufacturing costsFixed manufacturing costs $ $ $ $ Fixed manufacturing costsCost of good soldManufacturing overheadVariable manufacturing costsTotal annual costPurchase price Fixed manufacturing costsPurchase priceTotal annual costManufacturing overheadCost of good soldVariable manufacturing costs Variable manufacturing costsFixed manufacturing costsPurchase priceTotal annual costCost of good soldManufacturing overhead $ $ $ The company should makebuy the components.

Answer 1

Incremental analysis

		Per unit	Make	Buy	Net income Increase/Decrease
Number of units	60,000
Variable manufacturing cost		$1.95	117,000	0	117,000
Fixed manufacturing cost			60,000	40,000	20,000
Purchase price		$2.75	0	165,000	- 165,000
Total cost			$177,000	$205,000	- $28,000

The company should make the components.

Incremental gain from making = $28,000

Direct labor cost = $42,000

Direct material cost = $30,000

Variable overheads = $45,000

Variable manufacturing cost = Direct material cost + Direct labor cost + Variable overheads

= 30,000 + 42,000 + 45,000

= $117,000

Fixed overheads = $60,000

Avoidable fixed overheads = 60,000 x 1/3

= $20,000

Unavoidable fixed overheads = Fixed overheads - Avoidable fixed overheads

= 60,000 - 20,000

= $40,000

Outside supplier's price = $2.75 per unit

Total amount to be paid to the outside supplier = Number of units x Price per unit

= 60,000 x 2.75

= $165,000

kindly give a positive rating if you are satisfied with the solution. Please ask if you have any query related to the question, Thanks.