Brooks Company manufactured 6,000 units of a component part that is used in its
ID: 2535679 • Letter: B
Question
Brooks Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:
Direct materials $ 70,000
Direct labor 30,000
Variable manufacturing overhead 20,000
Fixed manufacturing overhead 40,000
$160,000
Another company has offered to sell the same component part to the company for $24 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Brooks Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $30,000.
Instructions
A) Prepare an incremental analysis report for Brooks Company which can serve as informational input into this make-or-buy decision.
Explanation / Answer
the following is the incremental analysis:
BUYING is the best option , since total cost is less under that option as compared to making option.
There will be annual saving of $6,000 due to buying.
Description make buy Increase (decrease) Direct materials $70,000 nil $70,000 Direct labour $30,000 nil $30,000 variable manufacturing overhead $20,000 nil $20,000 Purchase price nil $144,000 ($144,000) Total annual cost $120,000 $144,000 ($24,000) opportunity cost $30,000 nil $30,000 Total cost $150,000 $144,000 $6,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.