Question

Mighty Safe Fire Alarm is currently buying 62,000 motherboards from MotherBoard, Inc. at a price of $66 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $32 per unit; direct labor, $12 per unit; and variable factory overhead, $15 per unit. Fixed costs for the plant would increase by $87,000. Which option should be selected and why

Answer 1

d) Make, Increase in profits $434,000

Step-by-step explanation:

Differential analysis

Make Buy

Direct material (62000I*32) $1,984,000

Direct labor (62000*12) $744,000

Variable overhead (62000*15) $930,000

Purchase cost (62000*66) $4,092,000

Total relevant cost $3,658,000 $4,092,000

So, the Company Should make because the cost is lower. Increase in profits $434,000 ($,092,000-$3,658,000)