Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has provided the following unit costs for its commercial clocks: Direct materials $100 Direct labor 140 Variable overhead 80 Fixed overhead (40% avoidable) 150. Prepare an incremental analysis which shows the effect of the make-or-buy decision.

Question

Business

Leo Ritter

27 March, 03:05

Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has provided the following unit costs for its commercial clocks: Direct materials $100 Direct labor 140 Variable overhead 80 Fixed overhead (40% avoidable) 150. Prepare an incremental analysis which shows the effect of the make-or-buy decision.

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Answers (1)

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Madalyn Wolf · Answer 1

The production of the clocks should be continued, as buy option will increase the cost for the company by 48,000

Explanation:

Current escenario

100 DM x 1,200 = 120,000

140 DL x 1,200 = 168,000

80 VO x 1,200 = 96,000

Fixed Cost 150 x 1,200 = 180,000

Total cost = 564,000

420 x 1,200 = 504,000

60% fixed cost unavoudable 180,00 = 108,000

Total Cost 612,000

make 564,000

buy (612,000)

total cost saving (48,000)