Question

Oriole 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 make or 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 $ $ $

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 analysis shows that net income will be increased  by $

Answer 1

Prepare an incremental analysis showing whether the company should make or 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 $29900 $ $29900 Direct labor 25990 25990 Variable manufacturing costs 45700 45700 Fixed manufacturing costs 76000 57000 19000 Purchase price 160734 -160734 Total cost $177590 $217734 -40144

Company should make

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 $177590 $217734 -40144 Opportunity cost 44024 44024 Total cost $221614 $217734 $3880 . The analysis shows that net income will be increased  by $3880