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    Incremental analysis to make or buy wheels

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    Escher Skateboards has been manufacturing its own wheels for its skateboards. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% or direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $1.50 and 1.80, respectively. Normal production is 200,000 wheels per year.

    A supplier offers to make the wheels at a price of $4 each. If the skateboard company accepts this offer, all variable manufacturing costs will be eliminated but the $42,000 of the fixed manufacturing overhead currently being charged to the skateboard wheels will have to be absorbed by other products.

    What should my incremental analysis for the decision to make or buy the wheels look like?
    Should Escher Skateboard buy the wheels from the outside supplier? Justify your answer.

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    Solution Preview

    Please see the attached file.

    Escher Skateboards
    Normal production 200000
    Capacity utilization 100%
    Per unit 200000 units
    Direct material $1.50 $300,000
    Direct material $1.80 $360,000
    Variable manufacturing overhead $0.54 $108,000 30% of ...

    Solution Summary

    Excel file contains incremental analysis to make or buy wheels.