Question

Current Designs 7-1 (Part 3) (Part Level Submission) Current Designs faces a number of important decisions that require incremental analysis. One of Current Designs’ competitive advantages is found in the ingenuity of its owner and CEO, Mike Cichanowski. His involvement in the design of kayak molds and production techniques has led to Current Designs 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 components of a kayak, the seat. The “Revolution Seating System” is a 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. Having just designed the “Revolution Seating System,” Current Designs must now decide whether to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to produce the seats are as follows. Direct materials $19 /unit Direct labor $17 /unit Variable overhead $15 /unit Fixed overhead $20,000 Current Designs will need to produce 3,200 seats this year; 30% 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 $54 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.” (Enter decrease in net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000 or (15,000).) Make Buy Net Income Increase (Decrease) Direct Materials $ $ $ Direct Labor Variable Manufacturing Costs Fixed Manufacturing Costs Purchase Price Total Annual Cost $ $ $ Current Designs should buymake the Revolution Seating System. Would your answer in (a) change if the productive capacity released by not making the seats could be used to produce income of $25,000? (Enter decrease in net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000 or (15,000).) Make Buy Net Income Increase (Decrease) Total Annual Cost $ $ $ Opportunity Cost Total Cost $ $ $ Current Designs should makebuy the Revolution Seating System.

Answer 1

(a)		Make	Buy	Net Income Increase /(Decrease)
	Direct Materials	60,800	-	60,800
	Direct Labor	54,400	-	54,400
	Variable Manufacturing Costs	48,000	-	48,000
	Fixed Manufacturing Costs	6,000	-	6,000
	Purchase Price	-	172,800	(172,800)
	Total Annual Cost	169,200	172,800	(3,600)
	Make
(b)		Make	Buy	Net Income Increase /(Decrease)
	Total Annual Cost	169,200	172,800	(3,600)
	Opportunity Cost	-	(25,000)	25,000
	Total Cost	169,200	147,800	21,400
	Buy