Waterway Industries manufactures widgets Embree Company has

Waterway Industries manufactures widgets. Embree Company has approached Waterway with a proposal to sell the company widgets at a price of $140000 for 100000 units. Waterway is currently making these components in its own factory. The following costs are associated with this part of the process when 100000 units are produced:

$150,000

The manufacturing overhead consists of $26000 of costs that will be eliminated if the components are no longer produced by Waterway. From Waterway’s point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

Direct materials	$ 46500
Direct labor	43500
Manufacturing overhead	60000
Total	$150,000

Solution

Cost of Producing the 10,000 units of Widgets = Direct Materials $                 46,500 Direct Labours $                 43,500 Manufacturing Overhead (Variable ) $                 26,000 ($ 60,000 - $ 26,000 = $ 34,000 (Fixed) ) Add: Fixed Overhead $                 34,000 Total Cost of Manufacturing (A) $             1,50,000 Cost of Purchase of the Material =   $             1,40,000 Add: Unavoidabel Fixed Cost = $                 34,000 Total Purhcase Cost (B) $             1,74,000 Difference of A - B = $               -24,000 So, There is increamental cost of $ 24,000 Answer = Option 2 = $ 24,000 Increamental Cost