Ex. 187Agler Corporation currently manufactures a subassembly for its main product. The costs per unitare as follows:Direct materials$ 1Direct labor10Variable overhead5Fixed overhead8Total$24Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the subassemblies for$17 each. If Agler buys the subassemblies, $2 of the fixed overhead per unit will be allocated toother products.
7 - 85Incremental AnalysisEx. 187(Cont.)InstructionsShould Agler make or buy the subassemblies? Explain your answer.Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC:Problem Solving, IMA: Cost ManagementSolution 187(6 min.)Cost to make - cost to buy = incremental cost($24 – $2) – $17 = $5Incremental cost to make = $5 × 4,000 units = $20,000Agler should buy to save $5 per unit.Ex. 188Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company iscurrently operating at 100% capacity, and variable manufacturing overhead is charged toproduction at the rate of 60% of direct labor cost. The direct materials and direct labor cost perunit to make the bicycle seats are $8.00 and $9.00, respectively. Normal production is 50,000bicycles per year.A supplier offers to make the bicycle seats at a price of $21 each. If the bicycle company acceptsthis offer, all variable manufacturing costs will be eliminated, but the $30,000 of fixedmanufacturing overhead currently being charged to the bicycle seats will have to be absorbed byother products.Instructions(a)Prepare the incremental analysis for the decision to make or buy the bicycle seats.(b)Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC:Problem Solving, IMA: Cost ManagementSolution 188(15–20 min.)(a)Net IncomeMakeBuyIncrease (Decrease)Direct Materials (50,000 × $8)$ 400,000$ -0-$ 400,000Direct Labor (50,000 × $9)450,000-0-450,000Variable Manufacturing Costs ($450,000 × 60%)270,000-0-270,000Fixed Manufacturing Costs30,00030,000-0-Purchase Price (50,000 × $21)-0-1,050,000(1,050,000)Total annual cost$1,150,000$1,080,000$ 70,000(b)The seats should be purchased from the outside supplier. As indicated, the company's netincome would increase $70,000 by purchasing the seats.
7 - 86Incremental AnalysisEx. 189Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of itsproducts. The unit costs incurred to manufacture the component are as follows:Direct materials$65Direct labor48Overhead96Total$209Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis ofdirect labor dollars and consist of 50% variable costs and 50% fixed costs.
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