Question

Make or Buy Walsh Corporation currently makes the nylon mooring cover for its main product, a fiberglass boat designed for tournament bass fishing. The costs of producing the 2,000 covers needed each year follow: Nylon fabric Wood battens Brass fittings Direct labor Variable manufacturing overhead Fixed manufacturing overhead $335,000 64,000 32,000 128,000 96,000 160,000 Calvin Company, a specialty fabricator of synthetic materials, can make the needed covers of comparable quality for $335 each, F.O.B. shipping point. Walsh would furnish its own trademark insignia at a unit cost of $20. Transportation in would be 516 per unit, paid by Walsh Corporation. Walsh's chief accountant has prepared a cost analysis that shows that only 30% of fixed overhead could be avoided if the covers are purchased. The covers have been made in a remote section Walsh'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 mooring covers be purchased from Calvin 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 purchasecovers: Costs avoided by purchasingcovers: 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 covers could be devoted to a subcontracting job for another company that netted a contribution margin of $67,000, what maximum purchase price could Walsh pay for the covers?

Answer 1

Ans:

a.

Make or Buy Differential Analysis    Amount($)
Cost to purchase the covers ($335+$20+$16)*2000 covers		742,000.00
Cost avoided by purchasing the covers
Direct materials ($335,000+$64,000+$32,000)	431,000.00
Direct labor	128,000.00
Variable manufacturing overhead	96,000.00
Fixed manufacturing overhead ($160,000*30%)	48,000.00	703,000.00
Net advantage (disadvantage) to purchase alternative		-39,000.00

Ans:

b.

Total cost that can be saved by purchasing the covers = $703,000

Contribution margin that can be earned by letting out the facility = $67,000

Maximum cost that can be paid for the covers = $703,000 + $67,000 = $770,000

Maximum cost per cover = $770,000/2,000 covers = $385 per cover

Cost per cover for trademarking and transportation = $20+$16 = $36

Maximum price that can be paid for cover = $385 - $36 = $349