Question

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				$285,000
Aluminum tubing				96,000
Frame fittings				24,000
Direct labor				162,000
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 $420 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:		Answer
Costs avoided by purchasingtops:
Direct materials	Answer
Direct labor	Answer
Variable manufacturing overhead	Answer
Fixed manufacturing overhead	Answer	Answer
Net advantage (disadvantage) to purchase alternative		Answer

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 $46,100, what maximum purchase price could Allen Corporation pay for the tops?

Round answer to two decimal places, if applicable.

$Answer

Answer 1

$696,000 1 a. Make or Buy Differential Analysis 3 Cost to purchase tops: 4 Costs avoided by purchasing tops: 5 Direct materials $405,000 6 Direct labor $162,000 7 Variable manufacturing overhead $30,000 8 Fixed manufacturing overhead $30,400 9 Net advantage (disadvantage) to purchase alternative $627,400 (S68,600) Since there is a net disadvantage of $68,600 on purchasing tops, thus the tops should not 11 be purchased. 13 b. Maximum purchase price 14 (Without considering trademark and shipping cost) Maximum purchase price 15 (Considering trademark and shipping cost) $405 $361 Calculations are shown below: Α 1 a. Make or Buy Differential Analysis 3 Cost to purchase tops: =1500*(420+16+28) 4 Costs avoided by purchasing tops: 5 Direct materials I=285000+96000+240001 6 Direct labor 162000 7 Variable manufacturing overhead 30000 8 Fixed manufacturing overhead =152000*20% =SUM(B5B8) 9 Net advantage (disadvantage) to purchase alternative =C8-C3 10 11 Since there is a net disadvantage of $68,600 on purchasing tops, thus the tops should not be purchased. 13 b. Maximum purchase price 14 (Without considering trademark and shipping cost) Maximum purchase price 15 (Considering trademark and shipping cost) =420+(46100+C9)/1500) =B14-16-28