Question

One of Current Designs' competitive advantage is found in the ingenuity of its owners and CEO, Mike Cichanowski. His involvement in the design of Kayak molds and production techniques has let to them being recognized as an industry leader in the design and production of kayaks. This ingenuity was evident in an improved design of one of the most important component of a kayak, the seat. The "Revolution Seating System" is one of a kind, rotating axis seat that gives unmatched, full contact, under leg support. It is quickly adjustable with a lever lock system that allows for a customizable seat position that maximizes comfort for the rider. You must decider whether to produce internally or to buy from an outside supplier.The costs are as follows:

Direct Materials: $36/unit.

Direct Labor: $21.60/unit.

Variable Overhead: $27/unit

Fixed Overhead: $36000

Current Design will need to produce 5400 seats this year, 25% of the fixed overhead will be avoided if the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the company determined that it will cost $90 to purchase a seat from an outside vendor.

a) Prepare an incremental analysis showing whether Current Designs should make or buy the " Revolution Seating System." Based on the financial considerations should they make or buy the product?

b) Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of 36000.

Based on the financial considerations should they make or buy the product?

Answer 1

	Make Seats	Buy Seats	Increase(Decrease)
Direct Materials	$1,94,400.00		-$1,94,400.00
Direct labor	$1,16,640.00		-$1,16,640.00
Variable overhead	$1,45,800.00		-$1,45,800.00
Purchase price	$0.00	$4,86,000.00	$4,86,000.00
Savings in Fixed Costs($36,000*25%)		-$9,000.00	-$9,000.00
Total Unit cost	$4,56,840.00	$4,77,000.00	$20,160.00
Since the there is a additional cost of $20,160 in buying the Seat from outside hence it is better to produce
Yes the decision will change as the Income of $36,000 will lead to a savings of $15,840($36,000 - $20,160)