Make or Buy Walsh Corporation currently makes the nylon mooring cover for its ma

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:

Calvin Company, a specialty fabricator of synthetic materials, can make the needed covers of comparable quality for $325 each, F.O.B. shipping point. Walsh would furnish its own trademark insignia at a unit cost of $20. Transportation in would be $16 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 of 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.

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 $65,000, what maximum purchase price could Walsh pay for the covers?

Round answer to two decimal places, if applicable.

$Answer

Nylon fabric $325,000 Wood battens 64,000 Brass fittings 32,000 Direct labor 128,000 Variable manufacturing overhead 96,000 Fixed manufacturing overhead 160,000

Explanation / Answer

SOLUTION

A. Make or buy differential analysis-

B. Maximum purchase price-

= $325 + (65,000-29,000)/2,000)

= $325 + $18

= $343

Particulars Amount ($) Amount ($) Cost to purchase covers ($325+$20+$16)*2,000 722,000 Costs avoided by purchasing covers: Direct materials (325,000+64,000+32,000) 421,000 Direct labor 128,000 Variable manufacturing overhead 96,000 Fixed manufacturing overhead (160,000*30%) 48,000 693,000 Net advantage (disadvantage) to purchase alternative 29,000

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