Maplewood Company must decide whether to make or buy some of its components

Accounting Nov 05, 2020

Maplewood Company must decide whether to make or buy some of its components. The costs of producing 60,400 switches for its generators are as follows.

Direct materials		$29,596		Variable overhead		$46,508
Direct labour		42,280		Fixed overhead		59,796

Instead of making the switches at an average cost of $2.95 ($178,180 ÷ 60,400), the company has an opportunity to buy the switches at $2.75 per unit. If the company purchases the switches, all the variable costs and one-third of the fixed costs will be eliminated.

a) Prepare an incremental analysis showing whether the company should make or buy the switches. (Round per unit answers to 2 decimal places, e.g. 15.25. If an amount reduces the net income then enter with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

	Per Unit	Make	Buy	Net Income Increase (Decrease)
enter a number of units
	$enter a dollar amount	$enter a dollar amount	$enter a dollar amount	$enter a dollar amount
	enter a dollar amount	enter a dollar amount	enter a dollar amount	enter a dollar amount
	enter a dollar amount

The company should select an option ________ buy make the components.

b). Would your answer be different if the released productive capacity will generate additional income of $30,484?

If the released capacity can generate additional income of $30,484, then the company should select an option ______make purchase

the components.

2. Waterloo Co. sells product P-14 at a price of $48 a unit. The per-unit cost data are direct materials $16, direct labour $11, and overhead $16 (75% variable). Waterloo Co. has sufficient capacity to accept a special order for 35,300 units, but at a discount of 25% from the regular price. Selling costs associated with this order would be $4 per unit. Determine whether Waterloo Co. should accept the special order. (Enter loss with a negative sign preceding the number, e.g. -15,000 or parenthesis, e.g. (15,000).)

Incremental income (loss)

Expert Solution

a.		Per Unit		Make	Buy	Net Income Increase (Decrease)
	Number of units:	60,400
	Variable manufacturing costs		$1.96	118,384	-	118,384
	Fixed manufacturing costs		$0.99	59,796	39,864	19,932
	Purchase Price		$2.75	-	166,100	(166,100)
	Total annual cost		$5.70	178,180	205,964	(27,784)

	The company should make the components

b.				Make	Buy	Net Income Increase (Decrease)
	Total cost			178,180	205,964	(27,784)
	Opportunity cost			30,484	-	30,484
	Total cost			208,664	205,964	2,700

	The company should buy the components

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