Coleman Company owns a machine that produces a component for the products the company makes and sells.

The company uses 1,800 units of this component in production each year. The costs of making one unit of this component are
Direct material Variable manufacturing overhead Direct labor Fixed manufacturing overhead $7 $6 $4 $5

The fixed overhead costs are unavoidable, and the unit cost is based on the present annual usage of 1,800 units of the component. An outside supplier has offered to sell Coleman this component for $18 per unit and can supply all the units it needs. A. If Coleman buys the component from the outside supplier instead of making it, how much will net income change? Should Coleman make or buy the component? Use the incremental approach to justify your answer. B. Suppose Coleman could rent the machine to another company for $5,000 per year. How would your response change to part A? Use the incremental approach to justify your answer.

A. Since net income decreases, Coleman should continue making the component. Variable cost = $7 + $6 + $4 = $17
Incremental cost savings from not making component (1,800 x $17)=$30,600 Incremental cost of buying component (1,800 x $18)= (32,400) Incremental decrease in net income due to buying component= $(1,800)

B. Since net income increases, the company should choose to buy the components. Incremental cost savings from not making component (1,800 x $17)= $30,600 Incremental Annual rent from machine= $5,000 Incremental Cost of buying component (1,800 x $18)= (32,400) Incremental Increase in net income due to buying component = $3,200

 Sabab, Inc. produces 4 different qualities of cable for broadband internet hookups. Sabab currently produces 800,000 yards of economy cable each month. The costs of making each yard is $0.12 for direct materials, $0.05 for variable manufacturing overhead, $0.03 for variable administrative overhead, $0.06 for direct labor, and $0.12 for fixed manufacturing overhead. Overhead is allocated based on direct labor hours. An outside supplier has offered to sell Sabab economy cable for $0.28 per yard, and can supply all it needs. The company determined that 15% of the fixed overhead is avoidable if the company discontinues production of the economy cable. In addition, the company could lease the machine used to make the economy cable to another company for $8,000 annually. Determine if Sabab should outsource the component.

Incremental cost to buy ($224,000) Incremental variable cost savings Direct materials +96,000 Direct labor +48,000 Variable manufacturing overhead +40,000 Variable administrative overhead +24,000 Incremental fixed overhead savings +14,400 Incremental lease revenue is bought +8,000/12=666.67 ---------------------------------------------------------------------------------Incremental increase in profit if bought ($933.33)

Should Sabab outsource? No.

Smith Company manufactures widgets. Newman Company has approached Smith with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Smith is currently making these components in its own factory. The following costs are associated with this part of the process when 50,000 units are produced: Direct material $44,000 Direct labor $20,000 MOH $60,000 The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Smith. The remaining manufacturing overhead will continue whether or not Smith makes the components. Answer the following questions from Smith's point of view. Should Smith make or buy the components for the widgets?

Continue to make them because the incremental cost of buying from Newman is $4,000. Incremental analysis: Incremental cost to buy ($100,000) Incremental cost savings to make: DM + $44,000 DL + $20,000 MOH + $32,000

Incremental cost to buy ($4,000)