Question

Buddy Pets has recently started to manufacture talking toy pets.
The cost structure to manufacture 10,600 of these toy pets is as follows:

Direct materials ($32 per pet)		$339,200
Direct labour ($29 per pet)		307,400
Variable overhead ($11 per pet)		116,600
Allocated fixed overhead ($20 per pet)		212,000
Total		$975,200

Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $85 per unit.

Using incremental analysis, determine whether Buddy Pets should accept this offer under each of the following independent assumptions:

Prepare an incremental analysis. Assume that $106,000 of the fixed overhead cost (in making 10,600 of the toy pets) is avoidable. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Cost (Saving)
Purchase priceFixed overheadNet income / (loss)Variable overheadSalesDirect materialsDirect labour		$		$		$
Fixed overheadDirect labourVariable overheadPurchase priceSalesNet income / (loss)Direct materials
Net income / (loss)Variable overheadDirect materialsFixed overheadPurchase priceSalesDirect labour
Net income / (loss)Direct labourDirect materialsVariable overheadFixed overheadPurchase priceSales
Direct materialsNet income / (loss)Fixed overheadDirect labourVariable overheadPurchase priceSales
Total annual cost		$		$		$

Should Buddy Pets continue to make the pets or buy the pets?

Buddy Pets should

continue to makebuy

the pets.

Prepare an incremental analysis. Assume that none of the fixed overhead is avoidable. However, if the pets are purchased from Maxum, Buddy Pets can use the released productive resources to generate additional income of $175,800. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Cost (Saving)
Net incomeDirect materialsVariable overheadFixed overheadPurchase priceDirect labourSales		$		$		$
Net incomeFixed overheadDirect materialsVariable overheadPurchase priceDirect labourSales
Net incomePurchase priceSalesDirect materialsVariable overheadDirect labourFixed overhead
Direct labourPurchase priceVariable overheadSalesDirect materialsFixed overheadNet income
Direct materialsFixed overheadVariable overheadDirect labourPurchase priceSalesNet income
Total annual cost
AddLess : Opportunity cost
Total cost		$		$		$

Should Buddy Pets continue to make the pets or buy the pets?

Answer 1