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

The costs
of producing 60,000 switches for its generators are as follows.
Direct materials ………………. $30,000
Variable overhead ……………. $45,000
Direct labor …………………… $42,000
Fixed overhead ……………….. $60,000
Instead of making the switches at an average cost of $2.95 ($177,000 ÷ 60,000), the
company has an opportunity to buy the switches at $2.70 per unit. If the company
purchases the switches, all the 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 switches.
(b) Would your answer be different if the released productive capacity will generate
additional income of $34,000?

SOLUTION

(a)
Net Income
Make Buy Increase (Decrease)
Direct materials $ 30,000 $ –0– $ 30,000
Direct labor 42,000 –0– 42,000
Variable manufacturing
costs 45,000 –0– 45,000
Fixed manufacturing
costs 60,000 45,000 15,000
Purchase price –0– 162,000 (162,000)
Total cost $177,000 $207,000 $ (30,000)

Given the results of the above analysis, Rubble Company will incur $30,000 of
additional costs if it buys the switches.

(b)
Net Income

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 Make Buy Increase (Decrease)
Total cost $177,000 $207,000 $(30,000)
Opportunity cost 34,000 –0– 34,000
Total cost $211,000 $207,000 $ 4,000

Yes, the answer is different: The analysis shows that net income will be increased
by $4,000 if Rubble Company purchases the switches.

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