Flop Company manufactures 10,000 units of widgets for use in its annual producti

Question

Flop Company manufactures 10,000 units of widgets 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. Flimsy Company has offered to sell Flop 10,000 units of widgets for $18 per unit. If Flop accepts the offer, some of the facilities presently used to manufacture widgets could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to widgets would be totally eliminated.

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

Flop Inc.

Incremental Analysis

To Produce or Buy

Produce

Buy

Flop Inc.

Incremental Analysis

To Produce or Buy

Produce

Buy

Explanation / Answer

45000

Incremental cost of buying = $ 5000

so it should be internally manufactured. (not to accept offer)

Produce Buy Incremental savings /(cost) Direct material -20000 -- 20000 Direct labor -55000 - 55000 Variable overhead -45000 -

45000

Fixed overhead -70000 -30000 40000              [4*10000] Rental income - 15000 15000 Purchase cost - -180000    [18*10000] -180000 Income /cost -190000 -195000 -5000

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