Question

Make or Buy
Walsh Corporation currently makes the nylon mooring cover for its main product, a fiberglass boat designed for tournament bass fishing. The costs of producing the 2,000 covers needed each year follow:

Nylon fabric				$325,000
Wood battens				64,000
Brass fittings				32,000
Direct labor				128,000
Variable manufacturing overhead				96,000
Fixed manufacturing overhead				160,000

Calvin Company, a specialty fabricator of synthetic materials, can make the needed covers of comparable quality for $325 each, F.O.B. shipping point. Walsh would furnish its own trademark insignia at a unit cost of $20. Transportation in would be $16 per unit, paid by Walsh Corporation.

Walsh's chief accountant has prepared a cost analysis that shows that only 30% of fixed overhead could be avoided if the covers are purchased. The covers have been made in a remote section of Walsh's factory building, using equipment for which no alternate use is apparent in the foreseeable future.

a. Prepare a differential analysis showing whether or not you would recommend that the mooring covers be purchased from Calvin Company.

If appropriate, use a negative sign with your answer to represent a net disadvantage answer. Do not use negative signs with any other answers.

Make or Buy Differential Analysis
Cost to purchase covers:		$Answer
Costs avoided by purchasing covers:
Direct materials	$Answer
Direct labor	Answer
Variable manufacturing overhead	Answer
Fixed manufacturing overhead	Answer	Answer
Net advantage (disadvantage) to purchase alternative		$Answer

b. Assuming that the production capacity released by purchasing the covers could be devoted to a subcontracting job for another company that netted a contribution margin of $65,000, what maximum purchase price could Walsh pay for the covers?

Round answer to two decimal places, if applicable.

$Answer

Answer 1

		Nylon fabric	$325,000
		Wood battens	64,000
		Brass fittings	32,000
		Direct Materials	421,000	(325000+64000+32000)
		Direct labor	128,000
		Variable manufacturing overhead	96,000
		Fixed manufacturing overhead	160,000
		Total Cost	$805,000	(421000+128000+96000+160000)
		Quantity produced	2,000
		Unit Cost	$402.50	(805000/2000)
		UNIT COST TO PURCHASE COVERS
		FOB shipping point cost	$325
		Tansportation	$16
		Trademark ingignia	$20
		Unit Cost	$361
		Total cost for 2000 covers	$722,000	(2000*361)
		Make or Buy Differential Analysis
		Cost to purchase covers:		$722,000
		Costs avoided by purchasing covers:
		Direct materials	421,000
		Direct labor	128,000
		Variable manufacturing overhead	96,000
		Fixed manufacturing overhead	48000	693,000	(0.3*160000)=48000
		Net advantage (disadvantage) to purchase alternative		($29,000)
	b	Additional contribution margin	$65,000
		Net advantage(65000-29000)	$36,000
		Maximum additional price per unit	$18	(36000/2000)
		Maximum Purchase price that can be paid by Walsh	$343	(325+18)	FOB shipping point