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Incremental savings

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Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below:

Cost per Unit

Variable costs

Direct material


Direct labor


Variable overhead


Total variable costs


Fixed costs
Depreciation of equipment

Depreciation of building


Supervisory salaries


Total fixed costs

Total cost


The company has an offer from Duvall Valves to produce the part for $2,000 per unit and supply 1,000 valves (the number needed in the coming year). If the company accepts this offer and shuts down production of valves, production workers and supervisors will be reassigned to other areas. The equipment cannot be used elsewhere in the company, and it has no market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $55,000 per year.

What is the incremental savings of buying the valves?

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The file computes the incremental savings of buying.

See Also This Related BrainMass Solution

Hernandex, Inc. Make or buy decision - Incremental Analysis Exercise

Hernandex, Inc., manufactures 3 models of picture frames for a total of 5,000 frames per year.
The unit cost to produce a metal frame follows:

Direct Materials $8.50
Direct Labor $6.00
Variable Overhead $2.00
Fixed Overhead (70% unavoidable) $5.00
Total $21.50

A local company has offered to supply Hernandex the 5,000 metal frames it needs for $16 each.
Instructions: Create an incremental analysis for the make or buy decision.

Solution Template: (Note in dollars, not price per unit)
Incremental cost to buy $-
Incremental savings:
Direct materials savings $-
Direct labor savings $-
Variable overhead savings $-
Fixed overhead savings - avoidable portion $-
Incremental savings if 'buy' decision is made $-


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