Juanita Company must decide whether to make or buy some of its components for the appliances it produces. The costs of producing 166,000 electrical cords for its appliances are as follows.
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Direct materials
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$90,000
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Direct labor
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$20,000
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Variable overhead
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$32,000
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Fixed overhead
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$24,000
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Instead of making the electrical cords at an average cost per unit of $1.00 ($166,000 ÷ 166,000), the company has an opportunity to buy the cords at $0.90 per unit. If the company purchases the cords, all variable costs and one-fourth of the fixed costs will be eliminated.
(a) Prepare an incremental analysis showing whether the company should make or buy the electrical cords. (b) Will your answer be different if the released productive capacity will generate additional income of $5,000?
Look for the costs that change.
Ignore the costs that do not change.
Use the format in the chapter for your answer.
Recognize that opportunity cost can make a difference.