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: $$\begin{array} { l r }
\text { Direct material } & \$ 31,000 \
\text { Direct labor } & 29,000 \
\text { Manufacturing overhead } & 40,000 \
\text { Total } & \$ 100,000
\end{array}$$ 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?

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: $$\begin{array} { l r } 
\text { Direct material } & \$ 31,000 \
\text { Direct labor } & 29,000 \
\text { Manufacturing overhead } & 40,000 \
\text { Total } & \$ 100,000
\end{array}$$ 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?

Quizplus · Accepted Answer

The incremental cost is calculated by comparing the cost of buying the widgets to the avoidable costs of making them. The avoidable costs include direct material ($31,000), direct labor ($29,000), and the portion of manufacturing overhead that will be eliminated ($16,000), totaling $76,000. The cost to buy the widgets is $82,000. Therefore, the incremental cost of buying instead of making is $82,000 - $76,000 = $6,000.

Mallory Company Manufactures Widgets The Manufacturing Overhead Consists of $16,000 of Costs That Will