Question

If you are able to explain how you got your results it would really help me. thank you!

Make or Buy Allen Corporation currently makes the nylon convertible top for its main product, a fiberglass boat designed especially for water skiing. The costs of producing the 1,500 tops needed each year follow: Nylon fabric $290,000 Aluminum tubing 96,000 Frame fittings 24,000 162,000 Direct labor Variable manufacturing overhead 30,000 Fixed manufacturing overhead 152,000 Dustin Company, a specialty fabricator of synthetic materials, can make the needed tops of comparable quality for $425 each, F.O.B. shipping point. Allen would furnish its own trademark insignia at a unit cost of $16. Transportation in would be $28 per unit, paid by Allen Corporation. Allen's chief accountant has prepared a cost analysis that shows that only 20% of fixed overhead could be avoided if the tops are purchased. The tops have been made in a remote section of Allen's factory building, using equipment for which no alternate use is apparent in the foreseeable future. a. Prepare a differential analysis showing whether or not you would recommend that the convertible tops be purchased from Dustin Company. If appropriate, use a negative sign with your answer to represent a net disadvantage answer. Do not use negative signs with any other answers. Make or Buy Differential Analysis Cost to purchasetops: Costs avoided by purchasingtops: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Net advantage (disadvantage) to purchase alternative b. Assuming that the production capacity released by purchasing the tops could be devoted to a subcontracting job for another company that netted a contribution margin of $50,100, what maximum purchase price could Allen Corporation pay for the tops? Round answer to two decimal places, if applicable.

Answer 1

Solution a) Make or Buy Differencial Analaysis cost to purchase tops:=1500*(425+16+28) 703500 costs avoided by purchasing tops: Direct materials=290000+96000+24000 410000 Direct labor 162000 variable manufacturing over head 30000 fixed manufacturing overhead=152000*0.2 30400 632400 Net advantage (disadvantage) to purchase alternative | -71100 b) costs avoided by purchasing tops Add : CM from subcontracting job Total cost / Units Total unit cost Less: trade mark cost per unit Less: Transportation cost per unit Maximum price 632400 50100 682500 1500 455.00 16.00 28.00 411.00