Question

O

ld Camp Company manufactures awnings for its own line of tents. The company is currently operating at capacity and has received an offer from one of its suppliers to make the 12,000 awnings it needs for $22 each. Old Camp’s costs to make the awning are $10 in direct materials and $6 in direct labor. Variable manufacturing overhead is 75 percent of direct labor. If Old Camp accepts the offer, $40,000 of fixed manufacturing overhead currently being charged to the awnings will have to be absorbed by other product lines.  

Required:
1. Complete the incremental analysis for the decision to make or buy the awnings in the table provided below.

  

	Make	Buy	Net Income Increase (Decrease)
Direct Materials
Direct Labor
Variable OH
Fixed OH
Purchase Price
Total

2. Should Old Camp continue to manufacture the awnings or should they purchase the awnings from the supplier?

	Manufacture
	Purchase

3. Assuming that the capacity released by purchasing the awnings allowed Old Camp to record a profit of $22,000, should Old Camp continue to manufacture or purchase the awnings?

	Purchase
	Manufacture

Answer 1

Requirement 1

Net decrease in income = $18000

	Make	Buy	Net income Increase (Decrease)
Direct Materials	$1,20,000.00		$    1,20,000.00
Direct Labor	$   72,000.00		$       72,000.00
Variable OH	$   54,000.00		$       54,000.00
Fixed OH			$                       -
Purchase Price		$2,64,000.00	$ (2,64,000.00)
Total	$2,46,000.00	$2,64,000.00	$     (18,000.00)

Requirement 2

Answer-----Manufacture.

Manufacturing cost is less than purchase cost so its better to manufacture.

.

Requirement 3

Answer---- Purchase

There will be additional profit of $4000 if awnings are purchased

	Make	Buy	Net income Increase (Decrease)
Direct Materials	$ 1,20,000.00		$    1,20,000.00
Direct Labor	$    72,000.00		$        72,000.00
Variable OH	$    54,000.00		$        54,000.00
Fixed OH			$                       -
Purchase Price		$ 2,64,000.00	$ (2,64,000.00)
Total	$ 2,46,000.00	$ 2,64,000.00	$     (18,000.00)
Benefit to be achived on manufacturing		$   (22,000.00)	$        22,000.00
Total relevant cost	$ 2,46,000.00	$ 2,42,000.00	$          4,000.00