Coyle Company manufactured 6,000 units of a component part that is used in its p

Question

Coyle Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:

Another company has offered to sell the same component part to the company for $13 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, Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $22,000.

Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any field blank. Enter 0 for the amounts.)

Direct materials $35,000 Direct labor 15,000 Variable manufacturing overhead 10,000 Fixed manufacturing overhead 20,000 $80,000

Explanation / Answer

If Barnes manufacture the component part, the variable cost per unit is (35000+15000+10000)/6000 = $10/ unit

Incremental analysis for buying the component part:
Extra cost of buying (13-10) x 6000               (18000)
Extra contribution that can make                     22000
Net benefit                                                         4000

Thus, it is worth to buy the the component part as the there is a net benefit of doing so compare to make the component.

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