Question

Wildhorse Company must decide whether to make or buy some of its components. The costs of producing 68,900 switches for its generators are as follows. Direct materials $30,200 Variable overhead $44,600 Direct labor $46,455 Fixed overhead $82,000 Instead of making the switches at an average cost of $2.95 ($203,255 ÷ 68,900), the company has an opportunity to buy the switches at $2.66 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 $ $ $ Wildhorse Company will incur $ of additional costs if it makesbuys the switches.

Would your answer be different if the released productive capacity will generate additional income of $45,899? (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 $ $ $ YesNo , the answer is samedifferent . The analysis shows that net income will be decreasedincreased by $ .

Answer 1

Answer:

(a)

	Make		Buy		Net Income Increase (Decrease)
Direct materials	$ 30,200		$   -0-		$ 30,200
Direct labor	44,600		-0-		44,600
Variable manufacturing costs	46,455		-0-		46,455
Fixed manufacturing costs	82,000		61,500 (82000*3/4)		20,500
Purchase price	-0-		218,120 (82000*$2.66)		(218,120)
Total cost	$203,255		$279,620		$ (76,365)

Given the results of the above analysis, Wildhorse Company will incur $76365 of additional costs if it buys the switches.

(b)

	Make		Buy		Net Income Increase (Decrease)
Total Cost	$203,255		$279,620		$(76,365)
Opportunity cost	45,899		-0-		45,899
Total cost	$249,154		$279,620		$ 30,466

Yes, the answer is different: The analysis shows that net income will be increased by $30,466 if wildhorse Company purchases the switches.