Wilma Company must decide whether to make or buy some of its components. The cost of producing 60,000 switches for its generators are as follow: Direct Material $30,000 Direct Labor $42,000 Variable Overhead $45,000 Fixed Overhead $60,000 Instead of making the switches at $2.70 per unit. If the company purchases all the switches, all the variable cost and one-fourth of the fixed cost will be eliminated. (a) Prepare an incremental analysis showing whether the company should make or buy the switches. (b) Would your answer be different if the released productive capacity will generate additional income of $34,000

The company would incur $ 30,000 additional costs if it buys the switches.

No, the company should make switches in order to avoid additional costs even if the income is increased.

Explanation:

Wilma Company

                                       Make                     Buy                    Net Income

                                                                                         ( increase / decrease)

Direct Material             $30,000                                       $30,000                    

Direct Labor                 $42,000                                           $42,000

Variable Overhead     $45,000                                                $45,000

Fixed Overhead          $60,000                   $ 45000              $ 15000

Purchase Price                                           (2.7 *60,000)              

                                                                      162,000                 ( 162,000)

Total                          $177,000                     $ 207,000            (30,000)

The company should make the switches because it costs more to buy rather than to make.

The company would incur $ 30,000 additional costs if it buys the switches.

No because even if the income is increased the better option would be to make switches to save the additional costs.

Explanation: