Do It! Review 7-3 (Part Level Submission) Blue Company must decide whether to ma

Question

Do It! Review 7-3 (Part Level Submission)

Blue Company must decide whether to make or buy some of its components. The costs of producing 62,500 switches for its generators are as follows.

Direct materials

$30,700

Variable overhead

$45,800

Direct labor

$21,150

Fixed overhead

$83,600

Direct materials

$30,700

Variable overhead

$45,800

Direct labor

$21,150

Fixed overhead

$83,600

Your answer is partially correct. Try again. 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 Net Income Increase (Decrease) Make Buy Direct materials 3070 Direct labor 2115 2115 Variable manufacturing costs Fixed manufacturing costs Purchase price 45800 Total cost 181250 Blue Company will incur of additional costs if itBuys the switches.

Explanation / Answer

Solution:

Blue company will incur $51,450 of additional cost if it buys the switches.Therefore company should continue to make the switches.

Differential Analysis - Making Switches (alt 1) or Buying Switches (Alt2) Particulars Making Switches (Alt 1) Buying Switches (Alt 2) Financial advantage (Disadvantage) of buying (Alternative 2) Costs: Purchase Price (62500*$2.72) $0.00 $170,000.00 -$170,000.00 Direct material $30,700.00 $0.00 $30,700.00 Direct Labor $21,150.00 $0.00 $21,150.00 Variable overhead $45,800.00 $0.00 $45,800.00 Avoidable Fixed Manufacturing cost ($83,600/4) $20,900.00 $0.00 $20,900.00 Total Cost $118,550.00 $170,000.00 -$51,450.00

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