Wilma Company must decide whether to make or buy some of its components. The cos

Question

Wilma Company must decide whether to make or buy some of its components. The costs of producing 63,800 switches for its generators are as follows.
Direct materials $29,100 Variable overhead $44,800 Direct labor $40,462 Fixed overhead $76,400
Instead of making the switches at an average cost of $2.99 ($190,762 ÷ 63,800), the company has an opportunity to buy the switches at $2.70 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.

Explanation / Answer

Incremental analysis Make Buy Net Income Increase (Decrease) Direct materials 29100 0 29100 $ Direct labor 40462 0 40462 Variable manufacturing costs 44800 0 44800 Fixed manufacturing costs 76400 57300 19100 Purchase price 0 172260 -172260 Total cost 190762 229560 -38798 $ The company will incur an additional cost of $ 38798 ifit buys the switches Oppurtunity cost analysis Make Buy Net Income Increase (Decrease) Total Cost 190762 229560 -38798 Oppurtunity cost 42718 -42718 Total Cost 233480 186842 46638 Yes, the answer would be different , as then trhecost ofmaking the switches would increase because of the oppurtunity cost and the cost of purchasing the switches would decrease because the released proiductive capacity will generate further income Hence in thisscenario it is advisable to buy the swotches rather than make them

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