Concordia University - COMM 305 Temple, Inc

Accounting Apr 09, 2021

Concordia University - COMM 305
Temple, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Temple for $350 each. Temple needs 500 clocks annually. Temple has provided the following unit costs for its commercial clocks:

Direct materials $ 70

Direct labour 80

Variable overhead 75

Fixed overhead (30% avoidable) 120

Prepare an incremental analysis which shows the effect of the make or buy decision.

Expert Solution

Answer:

Incremental Analysis	Incremental Effect
Cost to buy (500 x $350)	($175,000)
Cost savings:
Savings of DM $70 x 500 =	$35,000
Savings of DL $80 x 500 =	40,000
Savings of VOH $75 x 500 =	37,500
Savings of FOH 30% x $120 x 500 =	18,000

Total cost savings +130,500

Net cost savings if commercial clocks are bought $ 44,500

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