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

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.

Make or Buy Differential Analysis
Cost to purchase covers:		$Answer
Costs avoided by purchasing covers:
Direct materials	$Answer
Direct labor	Answer
Variable manufacturing overhead	Answer
Fixed manufacturing overhead	Answer	Answer
Net advantage (disadvantage) to purchase alternative		$Answer

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

Answer 1

SOLUTION

A. Make or buy differential analysis-

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

B. Maximum purchase price-

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

= $325 + $18

= $343