Question 40

Maplewood 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		$30,000		Variable overhead		$45,000
Direct labour		42,000		Fixed overhead		60,000

Instead of making the switches at an average cost of $2.95 ($177,000 60,000), the company has an opportunity to buy the switches at $2.75 per unit. If the company purchases the switches, all the variable costs and one-third of the fixed costs will be eliminated.

(a)

Prepare an incremental analysis showing whether the company should make or buy the switches. (Round per unit answers to 2 decimal places, e.g. 15.25. If an amount reduces the net income then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

				Per Unit		Make		Buy		Net Income Increase (Decrease)
Number of units:
Manufacturing overheadTotal annual costCost of good soldPurchase priceVariable manufacturing costsFixed manufacturing costs				$		$		$		$
Fixed manufacturing costsCost of good soldManufacturing overheadVariable manufacturing costsTotal annual costPurchase price
Fixed manufacturing costsPurchase priceTotal annual costManufacturing overheadCost of good soldVariable manufacturing costs
Variable manufacturing costsFixed manufacturing costsPurchase priceTotal annual costCost of good soldManufacturing overhead						$		$		$

The company should

makebuy

the components.