Concordia University - COMM 305 Hernandez, Inc

Accounting Apr 09, 2021

Concordia University - COMM 305

Hernandez, Inc. manufactures 5 models of picture frames, for a total of 12,000 frames per year. The unit cost to produce a metal frame follows:

Direct Materials $ 4

Direct Labour 5

Variable Overhead 1

Fixed Overhead (60% unavoidable) 6

Total $16

A local company has offered to supply Hernandez the 12,000 metal frames it needs for

$12 each. Create an incremental analysis for the make or buy decision.

Expert Solution

Answer: $4,800


Incremental cost to buy	($144,000)
Incremental savings:
Direct materials savings	+$48,000
Direct labour savings	+60,000
Variable overhead savings	+12,000
Fixed overhead savings - avoidable portion	+28,800
Incremental savings if 'buy' decision is made	$4,800

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