Question

Wilma Company must decide whether to make or buy some of its components. The costs of producing 60,200 switches for its generators are as follows. Direct materials $29,900 Variable overhead $45,700 Direct labor $25,990 Fixed overhead $76,000 Instead of making the switches at an average cost of $2.95 ($177,590 ÷ 60,200), the company has an opportunity to buy the switches at $2.67 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated. Prepare an incremental analysis showing whether the company should buy the switches. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Direct materials $ $ $ Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost $ $ $ Wilma Company will incur $ of additional costs if it the switches. Would your answer be different if the released productive capacity will generate additional income of $44,024? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Make Buy Net Income Increase (Decrease) Total Cost $ $ $ Opportunity cost Total cost $ $ $ , the answer is . The analysis shows that net income will be by $ .

Answer 1

Differential Analysis
	Make	Buy	Income Increase(decrease)
Direct material	$          29,900.00		$           29,900.00
Direct labor	$          25,990.00		$           25,990.00
Variable Manufacturing Overheads	$          45,700.00		$           45,700.00
Avoidable Fixed Cost	$          19,000.00		$           19,000.00
Purchase price		$      160,734.00*	$      (160,734.00)
Total Relevant Cost	$       120,590.00	$      160,734.00	$         (40,144.00)

*60200 x 2.67

Company should not buy the switches from outside and must continue to produce in house.

Avoidable overhead cost is a cost of manufacturing switches. This is because this cost could be avoided if swithches are purchased. We can say that avoidable fixed overhead is like other variable cost that will be saved if no production is done.

Answer- Wilma Company will incur $40,144 of additional costs if it buys the switches

Final decision- Manufacture.

Requirement 2

Differential Analysis
	Make	Buy	Income Increase(decrease)
Direct material	$       29,900.00		$      29,900.00
Direct labor	$       25,990.00		$      25,990.00
Variable Manufacturing Overheads	$       45,700.00		$      45,700.00
Avoidable Fixed Cost	$       19,000.00		$      19,000.00
Opportunity cost	$       44,024.00		$      44,024.00
Purchase price		$ 160,734.00	$ (160,734.00)
Total Relevant Cost	$     164,614.00	$ 160,734.00	$        3,880.00

Answer--- Yes, Now my answer would be different.

Wilma Company will incur $3,880 of additional costs if it Manufactures the switches

Final decision-Buy