Unformatted text preview: 159 1522 (1) Cost of buying 40,000 connectors (40,000 x $1 .80) $72,000 Incremental costs of making: Direct materials $0.75 per connector Direct labor 0.30 Variable overhead 0.35 Total variable costs $1 .40 per connector x 40,000 = $56,000 Inspector's salary 15,000 Total incremental cost of making $71 ,000 The company will be better off making the connectors if it requires 40,000 units per year . Note that the $0.80 fixed overhead cost per unit is not used in this computation. If incremental fixed costs (such as the inspector's salary) must be incurred to make the components, they certainly must be considered. However , using a fixed overhead cost per unit does not allow proper consideration of incremental fixed costs. It makes fixed costs appear to be variable (which they are not) and can be very misleading. The only indication of incremental fixed costs given in this exercise is the need to incur the salary of the inspector . This salary is properly treated in the preceding computation. (2) Cost of buying 20,000 connectors (20,000 x $1 .80) $36,000 Incremental costs of making: Variable manufacturing (20,000 x $1 .40) $28,000 Inspector's salary 15,000 Total incremental cost of making $43,000 If the company needs 20,000 connectors per year , it will be cheaper for the company to buy the connectors. (3) Letting x be the number of connectors needed, the total cost of making the connectors is given by the cost equation: Cost of making = $1 .40x + $15,000 ...
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- Fall '07