incremental analysis
Calvin Company manufactures its own subassembly units known by the code name “ekrob.” Calvin incurs the following annual costs in producing 40,000 ekrobs:
Direct materials
$ 60,000
Direct labor
90,000
Variable overhead
50,000
Fixed overhead
80,000
Total
$280,000
Calvin can purchase the ekrobs from Hobbes Corporation for $6.00 per unit. If they purchase the ekrobs, only $30,000 of the fixed overhead will be eliminated. However, the vacant factory space can be used to increase production of another product, which would generate annual income of $22,000.
Instructions
Prepare an incremental analysis to determine whether Calvin should make or buy ekrobs.