Do It! Review 7-3 (Part Level Submission) (a) Do It! Review 7-3 (Part Level Subm
ID: 2557570 • Letter: D
Question
Do It! Review 7-3 (Part Level Submission)
(a)
Do It! Review 7-3 (Part Level Submission)
Ayayai Company must decide whether to make or buy some of its components. The costs of producing 60,000 switches for its generators are as follows.Direct materials $29,000 Variable overhead $44,000 Direct labor $25,000 Fixed overhead $76,000
Instead of making the switches at an average cost of $2.90 ($174,000 ÷ 60,000), the company has an opportunity to buy the switches at $2.65 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.
Explanation / Answer
Answer
Net Income
Make
Buy
Increase (Decrease)
Direct materials
$ 29,000.00
$ -
$ 29,000.00
Direct labor
$ 25,000.00
$ -
$ 25,000.00
Variable manufacturing costs
$ 44,000.00
$ -
$ 44,000.00
Fixed manufacturing costs
$ 76,000.00
$ 57,000.00 [76000 x ¾]
$ 19,000.00
Purchase price
$ 1,59,000.00 [60000 units x$2.65]
$ (1,59,000.00)
Total cost
$ 1,74,000.00
$ 2,16,000.00
$ (42,000.00)
Net Income
Make
Buy
Increase (Decrease)
Direct materials
$ 29,000.00
$ -
$ 29,000.00
Direct labor
$ 25,000.00
$ -
$ 25,000.00
Variable manufacturing costs
$ 44,000.00
$ -
$ 44,000.00
Fixed manufacturing costs
$ 76,000.00
$ 57,000.00 [76000 x ¾]
$ 19,000.00
Purchase price
$ 1,59,000.00 [60000 units x$2.65]
$ (1,59,000.00)
Total cost
$ 1,74,000.00
$ 2,16,000.00
$ (42,000.00)
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