Barney 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 $2.75 per unit. If the company purchases the switches, all the variable costs and one-third 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 $30,000?Evaluate make-or-buy opportunity.