Glind Company manufactures 10,000 units of wheel sets for use in its annual prod
ID: 2418164 • Letter: G
Question
Glind Company manufactures 10,000 units of wheel sets for use in its annual production. Costs are as follows: direct materials are $20,000; direct labor is $55,000; variable overhead is $45,000; and fixed overhead is $70,000. Ray's Company has offered to sell Glind 10,000 units of wheel sets for $18 per unit. If Glind accepts the offer, some of the facilities presently used to manufacture wheel sets could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to wheel sets would be totally eliminated.
Requirements: Prepare an incremental analysis schedule to demonstrate if Glind should accept Ray's offer.
Explanation / Answer
Incremental analysis schedule
Manufacture
Purchase
Increase / (Decrease) in income
Direct materials Costs
$ 20,000
$ -
$ 20,000
Direct labor Costs
$ 55,000
$ -
$ 55,000
Variable overhead Costs
$ 45,000
$ -
$ 45,000
Fixed overhead Costs
$ 70,000
$ 30,000
$ 40,000
(70000-10000*4)
Purchase costs of Wheel sets (10000*18)
$ 180,000
$ (180,000)
Rent on facility
$ -
$ (15,000)
$ 15,000
Net Decrease in Income
$ (5,000)
If we accept the Ray's Company offer to purchase wheel sets, we have to incurred loss of 5000,
hence it is better to manufacture wheel sets.
Incremental analysis schedule
Manufacture
Purchase
Increase / (Decrease) in income
Direct materials Costs
$ 20,000
$ -
$ 20,000
Direct labor Costs
$ 55,000
$ -
$ 55,000
Variable overhead Costs
$ 45,000
$ -
$ 45,000
Fixed overhead Costs
$ 70,000
$ 30,000
$ 40,000
(70000-10000*4)
Purchase costs of Wheel sets (10000*18)
$ 180,000
$ (180,000)
Rent on facility
$ -
$ (15,000)
$ 15,000
Net Decrease in Income
$ (5,000)
If we accept the Ray's Company offer to purchase wheel sets, we have to incurred loss of 5000,
hence it is better to manufacture wheel sets.