Question

Swifty Corporation manufactures widgets. Bowden Company has approached Swifty with a proposal to sell the company widgets at a price of $88560 for 100000 units. Swifty is currently making these components in its own factory. The following costs are associated with this part of the process when 100000 units are produced:
Direct material $ 33480

Direct labor 31320

Manufacturing overhead 43200

Total $108000

The manufacturing overhead consists of $17280 of costs that will be eliminated if the components are no longer produced by Swifty. From Swifty’s point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

a)$19440 incremental savings
b)$2160 incremental savings
c)$19440 incremental cost
d)$6480 incremental cost

Answer 1

Answer:D.$6480 Incremental cost

Explanation:

The cost of producing 100,00 units of wigdets are direct material plus direct labour and the overhead cost that will be eliminated if the widget is no longer produce by Swiftly which amounts to $17280.

This amount will be added because it's the amount of overhead directly attributable to the production of wigdets.

Additions of these cost leave the cost of manufacturing at $82,080.

Comparing this with the proposed sales price of $88560 means Swiftly will incur additional cost of $6480