Calvin Company manufactures its own subassembly units known by the code name "ekrob." Calvin incurs the following annual costs in producing 40,000 ekrobs:
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Direct materials
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$ 60,000
|
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Direct labor
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90,000
|
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Variable overhead
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50,000
|
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Fixed overhead
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80,000
|
|
Total
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$280,000
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Calvin can purchase the ekrobs from Hobbes Corporation for $6.00 per unit. If they purchase the ekrobs, only $30,000 of the fixed overhead will be eliminated. However, the vacant factory space can be used to increase production of another product, which would generate annual income of $22,000.
Instructions
Prepare an incremental analysis to determine whether Calvin should make or buy ekrobs.