Calvin Company manufactures its own subassembly units known by the code name “ekrob.” Calvin incurs the following annual costs in producing 40,000 ekrobs:

Direct materials

$ 60,000

Direct labor

90,000

Variable overhead

50,000

Fixed overhead

80,000

Total

$280,000

Calvin can purchase the ekrobs from Hobbes Corporation for $6.00 per unit. If they purchase the ekrobs, only $30,000 of the fixed overhead will be eliminated. However, the vacant factory space can be used to increase production of another product, which would generate annual income of $22,000.

Instructions

Prepare an incremental analysis to determine whether Calvin should make or buy ekrobs.