Question

PA7-9 (Algo) Analyzing Make-or-Buy Decision (LO 7-2, 7-4] Old Camp Company manufactures awnings for its own line of tents. The company is currently operating at capacity and has received an offer from one of its suppliers to make the 13,000 awnings it needs for $29 each. Old Camp's costs to make the awning are $16 in direct materials and $7 in direct labor. Variable manufacturing overhead is 75 percent of direct labor. If Old Camp accepts the offer, $46,000 of fixed manufacturing overhead currently being charged to the awnings will have to be absorbed by other product lines. Required: 1. Complete the incremental analysis for the decision to make or buy the awnings in the table provided below. 2. Should Old Camp continue to manufacture the awnings or should they purchase the awnings from the supplier? 3. Assuming that the capacity released by purchasing the awnings allowed Old Camp to record a profit of $22,000, should Old Camp continue to manufacture or purchase the awnings? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Complete the incremental analysis for the decision to make or buy the awnings in the table provided below. Make Buy Net Income Increase (Decrease) Direct Materials Direct Labor Variable OH Fixed OH Purchase Price Total Required 1 Required 2 >

Answer 1

Solution O Incremental Analysis for the decision to make (or) buy the awnings: (10 $ ) Particulars Make Buy a) No. of units 13000 13000 b) Rate per unit 29 c) purchasing cost atb 3,77,000 d Direct Material 13000x16 2,08,000 e) Direct Labour 13,000 x 7 91,000 £) variable Manufacturing DLX75%. 68950 over head 9) Fixed Manufacturing Given 46,000 46,000 overhead (unavoidable) !! h) Total cost 4,13,250 1,23,000 . By using incremental Analysis, If they make the awnings profit will be increased by = 4,23,000 - 4,13,250 :: profit = $ 9750 .. They should make the awnings.

2) old camp continue to manufacture the awnings 3) Assuming that the capacity released by Purchasing the awnings allowed told camp to record a profit of $ 22,000: a) making cost = $4.13,250 (as per 1) b) Buying cost = purchasing cost - Additional Profit = $4,23,000 - $ 22,000 = $ 4,01,000 c) If you make the awnings, Profet will be decreased -$4,13,250 - H,01,000 = $ 12,250 .: They should purchase the awnings from outside