Kendry Company must decide whether to make or buy some of its components. The co

Question

Kendry Company must decide whether to make or buy some of its components. The costs of producing 59,400 switches for its generators are as follows. Instead of making the switches at an average cost of $3.10 ($184,140 59,400), 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. Prepare an incremental analysis showing whether the company should make or buy the switches. (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.) Would your answer be different if the released productive capacity will generate additional income of $31,500? (If an amount reduces the net income for Increase (Decrease) column then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000). Enter all other amounts in all other columns as positive and subtract where necessary.)

Explanation / Answer

1.

* 2/3rd of 59100

** 2.9 x 59400 = 172260

Conclusion= It is better to make the component

2.

Conclusion= Now the decision will change and now It is better to Buy the component.

Particulars Make Buy Net Income- Increase (Decrease) Direct Material 29250 - 29250 Direct Labour 42390 - 42390 Variable Manufacturing Cost 53400 - 53400 Fixed Manufacturing Cost 59100 39400* 19700 Purchase Price - 172260** (172260) Total 184140 211660 (27520)

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