Do It! Review 7-3 Wilma Company must decide whether to make or buy some of its c
ID: 2541776 • Letter: D
Question
Do It! Review 7-3 Wilma Company must decide whether to make or buy some of its components. The costs of producing 67,900 switches for its generators are as follows. Direct materials$29,400 Variable overhead $45,300 Direct labor $42,526 Fixed overhead $82,400 Instead of making the switches at an average cost of $2.94 ($199,626 ÷ 67,900), the company has an opportunity to buy the switches at $2.68 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 buy the switches. (Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45). Net Income Increase (Decrease) Make Buy Direct materials Direct labor Variable manufacturing costs Fixed manufacturing costs Purchase price Total cost Wilma Company will incur $ of additional costs if it the switches.Explanation / Answer
Answers
Make
Buy
Net Income Increase (Decrease)
Direct materials
$ 29,400.00
$ -
$ 29,400.00
Direct labor
$ 42,526.00
$ -
$ 42,526.00
Variable overhead
$ 45,300.00
$ -
$ 45,300.00
Fixed manufacturing cost
$ 82,400.00
$ 61,800.00 [82400 x ¾]
$ 20,600.00
Purchase price
$ 1,81,972.00 [2.68 x 67900]
$ (1,81,972.00)
Total cost
$ 1,99,626.00
$ 2,43,772.00
$ (44,146.00)
Wilma Company will incur $44,146 of additional cost if it buys the switches.
Make
Buy
Net Income Increase (Decrease)
Total cost
$ 1,99,626.00
$ 2,43,772.00
$ (44,146.00)
Opportunity cost
$ (47,816.00)
$ 47,816.00
Total cost
$ 1,99,626.00
$ 1,95,956.00
$ 3,670.00
YES. The answer is DIFFERENT. The analysis shows that net income will be INCREASED by $3,670.
Make
Buy
Net Income Increase (Decrease)
Direct materials
$ 29,400.00
$ -
$ 29,400.00
Direct labor
$ 42,526.00
$ -
$ 42,526.00
Variable overhead
$ 45,300.00
$ -
$ 45,300.00
Fixed manufacturing cost
$ 82,400.00
$ 61,800.00 [82400 x ¾]
$ 20,600.00
Purchase price
$ 1,81,972.00 [2.68 x 67900]
$ (1,81,972.00)
Total cost
$ 1,99,626.00
$ 2,43,772.00
$ (44,146.00)
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