Question: Juanita Company must decide whether to make or buy some of its components for the appliances it produces. The costs of producing 166,000 electrical cords for its appliances are as follows.
Direct materials: $90,000;
Variable overhead: $32,000;
Direct labor: 20,000;
Fixed overhead: 24,000
Instead of making the electrical cords at an average cost per unit of $1.00 ($166,000 + 166,000), the company has an opportunity to buy the cords at $0.90 per unit. If the company purchases the cords, all variable costs and one-fourth of the fixed costs will be eliminated. Prepare an analysis showing
(1) whether the company should make or buy the electrical cords, and
(2) the difference in income between the two alternatives.