Wilma Company must decide whether to make or buy some of its components. The cos
ID: 2526799 • Letter: W
Question
Wilma 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 $30,200 Variable overhead $45,900 Direct labor $38,252 Fixed overhead $81,200
Instead of making the switches at an average cost of $2.91 ($195,552 ÷ 67,200), 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.
Explanation / Answer
Answers
$81200 x ¼ = $20,300
Fixed cost under ‘Buy’ option = 81200 – 20300 = $60,900
Make
Buy
Net Income Increase (Decrease)
Direct Material
$ 30,200.00
$ -
$ 30,200.00
Direct Labor
$ 38,252.00
$ -
$ 38,252.00
variable manufacturing Cost
$ 45,900.00
$ -
$ 45,900.00
Fixed manufacturing costs
$ 81,200.00
$ 60,900.00 [see working above]
$ 20,300.00
Purchase Price
$ -
$ 1,79,424.00 [67200 units x $2.67]
$ (1,79,424.00)
Total Cost
$ 1,95,552.00
$ 2,40,324.00
$ (44,772.00)
WILMA company will incur $44,772 of additional cost if it BUYS the switches.
Make
Buy
Net Income Increase (Decrease)
Total Cost
$ 1,95,552.00
$ 2,40,324.00
$ (44,772.00)
Opportunity Cost
$ 48,952.00
$ -
$ 48,952.00
Total Cost
$ 2,44,504.00
$ 2,40,324.00
$ 4,180.00
Make
Buy
Net Income Increase (Decrease)
Total Cost
$ 1,95,552.00
$ 2,40,324.00
$ (44,772.00)
Opportunity Cost
$ (48,952.00)
$ 48,952.00
Total Cost
$ 1,95,552.00
$ 1,91,372.00
$ 4,180.00
YES, the answer is DIFFERENT. The analysis shows that Net Income will be Increased by $4,180
Make
Buy
Net Income Increase (Decrease)
Direct Material
$ 30,200.00
$ -
$ 30,200.00
Direct Labor
$ 38,252.00
$ -
$ 38,252.00
variable manufacturing Cost
$ 45,900.00
$ -
$ 45,900.00
Fixed manufacturing costs
$ 81,200.00
$ 60,900.00 [see working above]
$ 20,300.00
Purchase Price
$ -
$ 1,79,424.00 [67200 units x $2.67]
$ (1,79,424.00)
Total Cost
$ 1,95,552.00
$ 2,40,324.00
$ (44,772.00)
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