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

Flounder Company must decide whether to make or buy some of its components. The costs of producing 63,800 switches for its generators are as follows.

Direct materials

$29,300

Variable overhead

$44,200

Direct labor

$30,634

Fixed overhead

$82,800

Instead of making the switches at an average cost of $2.93 ($186,934 63,800), the company has an opportunity to buy the switches at $2.74 per unit. If the company purchases the switches, all the 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 switches.