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Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $80,000 for 100,000 units. Chapman is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced:

Direct materials $ 31,000
Direct labor 29,000
Manufacturing overhead 40,000
Total $100,000

The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Chapman. From Chapman's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

a. $20,000 incremental savings

b. $4,000 incremental cost

c. $4,000 incremental savings

d. $20,000 incremental cost

Accounting Basics, Accounting

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