Culver Company must decide whether to make or buy some of its components. The co

Question

Culver Company must decide whether to make or buy some of its components. The costs of producing 67,200 switches for its generators are as follows Direct materials $31,000 Variable overhead $44,900 Direct labor $44,484 Fixed overhead $79,200 Instead of making the switches at an average cost of $2.97 ($199,584 ÷ 67,200), the company has an opportunity to buy the switches at $2.75 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated 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 31,000 44,484 44,900 31,000 Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price 484 900 ,200 177925 192159 Total cost 199584 Culver Company will incur $ of additional costs if it the switches

Explanation / Answer

Differential analysis

Culver company will incur $44616 of additional cost if it buy the switches.

Make Buy Net income increase (decrease) Direct material 31000 31000 Direct labour 44484 44484 Variable manufacturing overhead 44900 44900 Fixed manufacturing overhead 19800 19800 Purchase cost (67200*2.75) 184800 -184800 Total 140184 184800 -44616

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