*Do It! Review 12-3 (Part Level Submission) Cheyenne Company must decide whether

Question

*Do It! Review 12-3 (Part Level Submission) Cheyenne Company must decide whether to make or buy some of its components. The costs of producing 60,200 switches for its generators are as follows. Direct materials $29,900 Variable overhead $45,700 Direct labor $25,990 Fixed overhead $76,000 Instead of making the switches at an average cost of $2.95 ($177,590 ÷ 60,200), the company has an opportunity to buy the switches at $2.67 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated Your answer is partially correct. Try again. Prepare an incremental analysis showing whether the company should make or buy the switches. (If amount decreases net income then enter the amount using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Net Income Increase (Decrease Make Buy Direct materials 990 21939 1061 Direct labor 5990 21678 4312 Variable manufacturing costs Fixed manufacturing costs Purchase price 570 38117 7583 76000 2.95 2.67 0.22 Total cost 7759 160734 16856 Cheyenne Company will incur of additional costs if it the switches.

Explanation / Answer

Incremental analysis :

Cheyenne company will incur 40144 of additional costs if it buys the switches

Make Buy Net income increase (decrease) Direct material 29900 0 29900 Direct labour 25990 0 25990 Variable manufacturing overhead 45700 0 45700 Fixed manufacturing cost 76000 57000 19000 Purchase price 0 160734 -160734 Total 177590 217734 -40144

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