Question

Buddy Pets has recently started to manufacture talking toy pets. The cost structure to manufacture 13,400 of these toy pets is as follows: Direct materials ($34 per pet) $455,600 Direct labour ($30 per pet) 402,000 Variable overhead ($9 per pet) 120,600 Allocated fixed overhead ($24 per pet) 321,600 Total $1,299,800 Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $83 per unit. Using incremental analysis, determine whether Buddy Pets should accept this offer under each of the following independent assumptions:

Prepare an incremental analysis. Assume that $120,600 of the fixed overhead cost (in making 13,400 of the toy pets) is avoidable. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).) Cost Make Buy Cost (Saving) Net income / (loss)Direct materialsSalesDirect labourVariable overheadFixed overheadPurchase price $ $ $ Direct labourDirect materialsVariable overheadNet income / (loss)Fixed overheadPurchase priceSales SalesPurchase priceNet income / (loss)Direct materialsDirect labourVariable overheadFixed overhead Fixed overheadVariable overheadDirect materialsPurchase priceDirect labourSalesNet income / (loss) Variable overheadFixed overheadDirect labourDirect materialsPurchase priceSalesNet income / (loss) Total annual cost $ $ $ Should Buddy Pets continue to make the pets or buy the pets? Buddy Pets should buycontinue to make the pets.

Prepare an incremental analysis. Assume that none of the fixed overhead is avoidable. However, if the pets are purchased from Maxum, Buddy Pets can use the released productive resources to generate additional income of $207,600. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).) Cost Make Buy Cost (Saving) Direct materialsNet incomeDirect labourVariable overheadFixed overheadPurchase priceSales $ $ $ Variable overheadDirect materialsFixed overheadPurchase priceNet incomeSalesDirect labour Variable overheadDirect labourSalesDirect materialsNet incomePurchase priceFixed overhead Net incomeDirect materialsDirect labourVariable overheadFixed overheadPurchase priceSales SalesFixed overheadPurchase priceVariable overheadDirect materialsNet incomeDirect labour Total annual cost LessAdd : Opportunity cost Total cost $ $ $ Should Buddy Pets continue to make the pets or buy the pets? Buddy Pets should buycontinue to make the pets.

Answer 1

Prepare an incremental analysis. Assume that $120,600 of the fixed overhead cost (in making 13,400 of the toy pets) is avoidable. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost	Make	Buy	Cost (Saving)
Direct materials	$455600		-$455600
Direct labor	$402000		-$402000
Variable overhead	$120600		-$120600
Fixed overhead	$120600		-$120600
Purchase price		(13400 * $83) =$1112200	$1112200
Total annual cost	$1098800	$1112200	$13400

Buddy Pets should continue to make the pets

Prepare an incremental analysis. Assume that none of the fixed overhead is avoidable. However, if the pets are purchased from Maxum, Buddy Pets can use the released productive resources to generate additional income of $207,600. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost	Make	Buy	Cost (Saving)
Direct materials	$455600		-$455600
Direct labor	$402000		-$402000
Variable overhead	$120600		-$120600
Fixed overhead	$120600		-$120600
Purchase price		(13400 * $83) =$1112200	$1112200
Total annual cost	$1098800	$1112200	$13400
Add: Opportunity cost	$207600	-	-$207600
Total Cost	$1306400	$1112200	-$194200

Buddy Pets should Buy the pets