Bert Company must decide whether to make or buy some of its components. The cost
ID: 2475288 • Letter: B
Question
Bert Company must decide whether to make or buy some of its components. The costs of producing 61,100 switches for its generators are as follows. Instead of making the switches at an average cost of $3.10 ($189,410 61,100), the company has an opportunity to buy the switches at $2.90 per unit. If the company purchases the switches, all the variable costs and one-third of the fixed costs will be eliminated. (a) Prepare an incremental analysis showing whether the company should make or buy the switches. (b) Would your answer be different if the released productive capacity will generate additional income of $31,600?Explanation / Answer
Make $ Buy $ Net Income Increase (-) Decrease $ Direct materials 30,690 - 30,690 Direct Labour 42,520 - 42,520 Variable manufacturing costs 58,000 - 58,000 Fixed manufacturing costs 58,200 38,800 19,400 Purchase price - 1,77,190 -1,77,190 Total costs 1,89,410 2,15,990 -26,580 a)Best company should Make the Switches (if company buy the switches it will decrease net income by $26,580 Make $ Buy $ Net Income Increase (-) Decrease $ Direct materials 30,690 - 30,690 Direct Labour 42,520 - 42,520 Variable manufacturing costs 58,000 - 58,000 Fixed manufacturing costs 58,200 38,800 19,400 Purchase price - 1,77,190 -1,77,190 Additional income - -31,600 31,600 Total costs 1,89,410 1,84,390 5,020 b) If the released prductive capacity generate additional income of $31,600 the company should buy the Switches, because it gives $5,020 net income increase compared to making the switches
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