QUESTION 3 Partially correct Points out of 8.00 ?Rag question Make or Buy Allen

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QUESTION 3 Partially correct Points out of 8.00 ?Rag question Make or Buy Allen Corporation currently makes the nylon convertible top for its main product, a fiberglass boat designed especially for water sking. The costs of producing the 1,500 tops needed each year follow Nylon fabric Aluminum tubing Frame fittings Direct labor Variable manufacturing overhead 30,000 $275,000 96,000 24,000 162,000 152,000 Dustin Company, a specialty fabricator o synthetic materials, can make the needed tops of comparable quality for $410 each, FO.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 681,0 Cost to purchase tops: Costs avoided by purchasing tops: Direct materials 395,0 Direct labor 162,0 Variable manufacturing overhead 30,00 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 $45,600, what maximum purchase price could Allen C pay for the tops? Round answer to two decimal places, if applicable. Check

Explanation / Answer

Question - b

Realization of alternative earning of 45600 shall decrease the current DISADVANTAGE to 18000.

To eliminate this loss cost per top should be reduced by 18000 / 1500 = 12 per Unit

So Maximum price acceptable = 410 - 12 = 398 per Unit.

Cost to purchase tops 681000 Costs avoided by purchasing tops Direct materials 395000 Direct labor 162000 Variable MOH 30000 Fixed MOH = 20% of 152000 30400 617400 Net DISADVANTAGE to purchase alternative 63600

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