The Coffey Company manufactured 5,000 units of a component part that is used in
ID: 2343507 • Letter: T
Question
The Coffey Company manufactured 5,000 units of a component part that is used in its product and incurred the following costs: Direct material $20,000 Direct labor 10,000 Variable manufacturing overhead 4,000 Fixed manufacturing overhead 6,000 $40,000 Another company has offered to sell the same component part to the company for $ 7.50 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, the Coffey Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $ 5,000. Prepare an incremental analysis report for the Coffey Company which can serve as information input into this make or buy decision.Explanation / Answer
It is wrong. As the in the Buy section Purchase price is not correct and the contribution from another product is not considered the correct answer will be Total of buying section = 6000 + 5000*7.5 + (5000) = 38500 Therefore buying decision is correct because make decision have an incremental cost of 1500 (40000-38500).