Barnes Company manufactured 6,000 units of a component part that is used in its

Question

Barnes Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:

Direct materials $35,000
Direct labor 15,000
Variable manufacturing overhead 10,000
Fixed manufacturing overhead 20,000
$80,000

Another company has offered to sell the same component part to the company for $12.00 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Barnes Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $16,000.

Instructions
Prepare an incremental analysis report for Barnes Company which can serve as informational input into this make or buy decision.

Explanation / Answer

If Barnes manufacture the component part, the variable cost per unit is (35000+15000+10000)/6000 = $10/ unit

Incremental analysis for buying the component part:
Extra cost of buying (12-10) x 6000 (12000)
Extra contribution that can make                     16000
Net benefit                                                      4000

Thus, it is worth to buy the the component part as the there is a net benefit of doing so compare to make the component.

Hope this helps!

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