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				$270,000
Aluminum tubing				96,000
Frame fittings				24,000
Direct labor				162,000
Variable manufacturing overhead				30,000
Fixed manufacturing overhead				180,000

Dustin Company, a specialty fabricator of synthetic materials, can make the needed tops of comparable quality for $390 each, F.O.B. shipping point. Allen would furnish its own trademark insignia at a unit cost of $12. Transportation in would be $18 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

Answer 1

Particulars	Make	Buy	Increase/Decrease in income
Purchase price	0	585000	-585000
Direct material	390000	0	390000
Direct labor	162000	0	162000
Variable manufacturing overheads	30000	0	30000
Fixed manufacturing overheads	180000	144000	36000
Trademark costs	0	18000	-18000
Transportation costs		27000	-27000
Total cost	762000	774000	-12000

As the costs are higher if we directly purchase, the company should not buy it and continue with the production.