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1. Wilma Company must decide whether to make or buy some of its components. The costs of...

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1. Wilma Company must decide whether to make or buy some of its components. The costs of producing 60,000 switches for its generators are as follows.

Direct materials$29,000Variable overhead$44,000
Direct labor$25,000Fixed overhead$76,000

Instead of making the switches at an average cost of {eq}\$2.90\left ( \frac{\$174,000}{60,000} \right ) {/eq}, the company has an opportunity to buy the switches at $2.65 per unit. If the company purchases the switches, all the variable costs and one-fourth of the fixed costs will be eliminated.

Prepare an incremental analysis showing whether the company should buy the switches.

2. Mesa Verde manufactures unpainted furniture for the do-it-yourself (DIY) market. It currently sells a table for $66. Production costs are $43 variable and $13 fixed. Mesa Verde is considering staining and sealing the table to sell it for $107. Variable costs to finish each table are expected to be $16, and fixed costs are expected to be $3.

Prepare an analysis showing whether Mesa Verde should process the tables further.

Relevant & Irrelevant Costs for Decision-Making:

Relevant costs in decision making are always avoidable if the other alternative is chosen, and include costs such as variable manufacturing costs and opportunity costs. Irrelevant costs are unavoidable and therefore not different between the alternatives.

Answer and Explanation: 1

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1. Wilma Company:

...
Make 60,000 switches Buy 60,000 switches
Purchase cost
@ $2.65 per unit
$159,000
Direct materials$29,000
Direct labor$25,000

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Relevant & Irrelevant Costs for Decision-Making

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Chapter 8 / Lesson 1
41K

In accounting, there are relevant and irrelevant costs. Relevant costs include differential, avoidable, and opportunity costs. Irrelevant costs include sunk and fixed overhead costs. In this lesson, we will learn about these and calculate them.


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