Question

Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 900 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 900 baskets. The company determined that 30% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $13 each, and can supply all the units it needs.
Required:
a. Prepare an incremental analysis to determine if Calc should buy the baskets from the supplier.
b. Show the impact on net income and indicate whether they should make or buy the baskets.

Answer 1

Answer:

                        Cost Structure of producing 900 units

Particulars                                       Cost         Monthly                Total cost

                                                      per unit   production Units  

Direct material cost                           4                900                    $3,600

Direct Labor                                       2                 900                    $1,800

Variable manufacturing overheads 3                  900                    $2,700

Fixed Manufacturing overhead

Avoidable (30% of $5)                     2                   900                    $1,350

Unavoidable (70% of $5)                 4                   900                    $3,150

Total cost of making 900 units                                            $12,600

          Cost Structure of buying 900 units from outside supplier

Particulars                                 Cost per   Units required     Total cost

                                                      unit           to buy

Cost of purchase                          13                900                    $11,700

Fixed Manufacturing overhead

Unavoidable                                                                       $3,150

Total cost of buying 900 units                                       $14,850

Conclusion: Because the cost of making is lesser than cost of buying bythe amount of $2,250, the company will have to choose option of making the basket.