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Juanita Company must decide whether to make or buy some of its
components for the appliances it produces. The costs of producing
166,000 electrical cords for its appliances are as follows.
|
Direct materials
|
$90,000
|
|
Direct labor
|
$20,000
|
|
Variable overhead
|
$32,000
|
|
Fixed overhead
|
$24,000
|
Instead of making the electrical cords at an average cost per unit of
$1.00 ($166,000 ÷ 166,000), the company has an opportunity to buy the
cords at $0.90 per unit. If the company purchases the cords, all
variable costs and one-fourth of the fixed costs will be eliminated.
(a) Prepare an incremental analysis showing whether the company
should make or buy the electrical cords. (b) Will your answer be
different if the released productive capacity will generate additional
income of $5,000?
Look for the costs that change.
Ignore the costs that do not change.
Use the format in the chapter for your answer.
Recognize that opportunity cost can make a difference.
