Carlsen Company manufactured 6,000 units of a component part that is used in its
ID: 2353116 • Letter: C
Question
Carlsen Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:Direct Materials $70,000
Direct Labor 20,000
Variable Manufacturing overhead 30,000
fixed manufacturer overhead 40,000
________
160,000
Another company has offered to sell the same component part to the company for $24 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, Carlsen Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $30,000.
Instructions
Prepare an incremental analysis report for Carlsen Company, which can serve as informational input into this make-or-buy decision.
Explanation / Answer
Additional costs if purchased on outside $24 *6,000= 144,000 Costs saved Direct materials 70,000 Direct Labor 20,000 Variable O/H 30,000 Total cost saved 120,000 Contribution margin from other product 30,000 Net cost (6,000) Since the benefits exceed the costs by $6K, the product should be purchased outside.