Answer:
1) Using incremental analysis, accept this offer because it shall result in incremental Net Income of $13,000.
2) The offer should not be accepted because it shall result in incremental Net Loss of $17,000.
Explanation:
Assume that $405,000 of the fixed overhead cots can be avoided
Make Buy Net Income Income
Increase Increase
(Decrease) (Decrease)
Direct materials $980,000 $0 $980,000 $0
Direct labor $764,400 $0 $764,400 $0
Variable overhead $137,200 $0 $137,200 $0
Fixed overhead $600,000 $195,000 $405,000 $405,000
Purchase price $0 $2,273,600 ($2,273,600) ($392,000)
Total annual cost $2,481,600 $2,468,600 $13,000 $13,000
Using incremental analysis, accept this offer because it shall result in incremental Net Income of $13,000.
Make Buy Net Income Income
Increase Increase
(Decrease) (Decrease)
Direct materials $980,000 $0 $980,000 $0
Direct labor $764,400 $0 $764,400 $0
Variable overhead $137,200 $0 $137,200 $0
Fixed overhead $600,000 $600,000 $0 $0
Opportunity cost $375,000 $0 $375,000 $375,000
Purchase price $0 $2,273,600 ($2,273,600) ($392,000)
Total annual cost $2,856,600 $2,873,600 ($17,000) ($17,000)
The offer should not be accepted because it shall result in incremental Net Loss of $17,000.
