Question

Temple, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Temple for $350 each. Temple needs 500 clocks annually. Temple has provided the following unit costs for its commercial clocks:

Direct materials	$ 70
Direct labour	80
Variable overhead	75
Fixed overhead (30% avoidable)	120

Prepare an incremental analysis which shows the effect of the make or buy decision.

		$175,000
		$130,500
		$44,500
		$11,000

Answer 1

Financial benefit of making = $44,500

Incremental analysis

Incremental Analysis
	Make	Buy	Increase (Decrease) in income if Goods are purchased from outside
Direct material	$       35,000.00		$          35,000.00
Direct labor	$       40,000.00		$          40,000.00
Variable Overheads	$       37,500.00		$          37,500.00
Avoidable Fixed overhead	$       18,000.00		$          18,000.00
Purchase price		$       175,000.00	$     (175,000.00)
Additional benefit from Buying from outside			$                         -
Total relevant Cost	$     130,500.00	$       175,000.00	$       (44,500.00)

.

Total Cost of Buying	$           175,000
Total Cost of manufacturing	$           130,500
Financial advantage of making	$             44,500