Question

Old 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 $26 each. Old Camp’s costs to make the awning are $13 in direct materials and $7 in direct labor. Variable manufacturing overhead is 75 percent of direct labor. If Old Camp accepts the offer, $43,000 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.
2. Should Old Camp continue to manufacture the awnings or should they purchase the awnings from the supplier?
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?

1.

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

Answer 1

Answer
1
			Make	Buy	Net Income
					Increase/ ( Decrease)
	Direct Material	12000*13	$156,000	$          -	$                     156,000
	Direct Labor	12000*7	$ 84,000	$          -	$                       84,000
	Variable OH	84000*75%	$ 63,000	$          -	$                       63,000
	Fixed OH		$ 43,000	$ 43,000	$                              -
	Purchase Price	12000*26		$312,000	-$                    312,000
	Total		$346,000	$355,000	-$                        9,000
2	It should continue to manufacture
3	If it will make the profit of $ 22000
	Net	22000-9000 = $ 13000 profit
	Then it should purchase from outside