RSW Company manufactures 10,000 units of wheel sets for use in its annual produc

Question

RSW Company manufactures 10,000 units of wheel sets for use in its annual production. Costs are direct materials $20,000, direct labor $55,000, variable overhead $45,000, and fixed overhead $70,000. Rayco Company has offered to sell RSW 10,000 units of wheel sets for $18 per unit. If RSW accepts the offer, some of the facilities presently used to manufacture wheel sets could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to wheel sets would be totally eliminated.

Requirements: Prepare an incremental analysis schedule to demonstrate if RSW should accept Rayco's offer.

Explanation / Answer

RSW shall not accept the offer as it would result in decrease in net income or incremental cost of $ 5000

Increase /(decease) in income savings   in cost Direct material 20000 Direct labor 55000 Variable overhead    45000 Fixed overhead   (4 *10000) 40000 Rental income 15000 less:Incremntal purchase cost (10000*18) -180000 Incremental income /(loss) -5000

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