Question

Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: Direct material $ 31,000 Direct labor 29,000 Manufacturing overhead 40,000 Total $100,000 The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made? Select one: a. $18,000 incremental savings b. $6,000 incremental cost c. $2,000 incremental savings d. $18,000 incremental cost

Answer 1

The incremental cost for Mallory Company if it decides to buy the widgets instead of making them would be $6,000, indicating that it would be more expensive to buy the widgets.

Step-by-step explanation:

To determine the incremental cost or savings if Mallory Company buys widgets instead of making them, we must compare the total cost of purchasing the widgets with the costs saved by not manufacturing them in-house. The proposal from Bowden Company is to sell 100,000 units at a price of $82,000.

When producing these widgets, Mallory incurs direct material costs of $31,000, direct labor costs of $29,000, and manufacturing overhead of $40,000, for a total of $100,000. However, if Mallory stops production, it will save on some manufacturing overhead costs. Specifically, $16,000 of the manufacturing overhead would be eliminated.

Therefore, when considering whether to buy the widgets, Mallory should take into account the total purchasing cost of $82,000 plus the remaining overhead that would not be eliminated, which is $40,000 - $16,000 = $24,000. This gives a total cost of purchasing of $82,000 + $24,000 = $106,000. Comparing this to the current production cost of $100,000, the difference is $106,000 - $100,000 = $6,000. This means that buying the widgets would result in an incremental cost of $6,000 for Mallory Company.

Answer 2

$6,000 incremental cost

Step-by-step explanation:

Manufacturing the widgets in-house would be a more cost effective method than buying from Bowden Company.

Direct Costs relating to in-house manufacturing (of 100,000 units) are as follows:

Direct material = $31,000

Direct labour = $29,000

Manufacturing overhead directly related to the manufacture of the widgets: $16,000.

Therefore, total direct costs = $76,000.

Only the portion of manufacturing overhead directly affected by the widget production needs to be account for. This is because manufacturing overhead will be incurred irrespective of whether Mallory Company produces the widget or not. Therefore, manufacturing overhead is not an incremental cost incurred by the widget production, except for the portion directly affected.

Accordingly, producing in-house ($76,000 direct cost) is more cost effective that buying from Bowden Company ($82,000) by $6,000.

The incremental cost if the widgets are bought instead of made is therefore $6,000.