Question

Marigold Company must decide whether to make or buy some of its components. The costs of producing 60,200 switches for its generators are as follows. Direct materials $29,500 Variable overhead $45,600 Direct labor $25,900 Fixed overhead $79,600 Instead of making the switches at an average cost of $3.00 ($180,600 ÷ 60,200), 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. Prepare an incremental analysis showing whether the company should buy the switches. (Enter negative amounts using either a negative s e.g.-45 or parentheses e.g. (45).)

Answer 1

Answer:

Instructions are listed below-

Explanation:

Giving the following information:

The costs of producing 60,200 switches for its generators are as follows:

Direct materials $29,500 (29,500/60,200= 0.49)

Variable overhead $45,600 (45600/60200=0.76)

Direct labor $25,900 (25900/60200= 0.43)

Fixed overhead $79,600 (79,600*0.25= 19,900)

Instead of making the switches at an average cost of $3.00 ($180,600 ÷ 60,200), 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.

Make in house= (0.49 + 0.76 + 0.43)*60,200 + 19,900= $121,036

We only have into account 25% of fixed costs that are avoidable.

Outsource= 2.74*60,200= $164,948

It is cheaper to make in the house.