ADMS 2510 Lecture : Week10 Tutorial Question Solution.docx
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Make orBuy
Walsh Corporation currently makes the nylon mooring cover for itsmain product, a fiberglass boat designed for tournament bassfishing. The costs of producing the 2,000 covers needed each yearfollow:
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, aspecialty fabricator of synthetic materials, can make the neededcovers 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 WalshCorporation.
Walsh's chiefaccountant has prepared a cost analysis that shows that only 30% offixed overhead could be avoided if the covers are purchased. Thecovers have been made in a remote section of Walsh's factorybuilding, using equipment for which no alternate use is apparent inthe foreseeable future.
a. Prepare adifferential analysis showing whether or not you would recommendthat the mooring covers be purchased from Calvin Company.
If appropriate, use anegative sign with your answer to represent a net disadvantageanswer. 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 theproduction capacity released by purchasing the covers could bedevoted to a subcontracting job for another company that netted acontribution margin of $65,000, what maximum purchase price couldWalsh pay for the covers?
Round answer to twodecimal places, if applicable.
$Answer
Make-or-Buy Decision
Matchless Computer Company has been purchasing carrying casesfor its portable computers at a delivered cost of $62 per unit. Thecompany, which is currently operating below full capacity, chargesfactory overhead to production at the rate of 38% of direct laborcost. The fully absorbed unit costs to produce comparable carryingcases are expected to be as follows:
Direct materials | $28.00 |
Direct labor | 22.00 |
Factory overhead (38% of directlabor) | 8.36 |
Total cost per unit | $58.36 |
If Matchless Computer Company manufactures the carrying cases,fixed factory overhead costs will not increase and variable factoryoverhead costs associated with the cases are expected to be 16% ofthe direct labor costs.
a. Prepare a differential analysis, datedOctober 11, 2014, to determine whether the company should make(Alternative 1) or buy (Alternative 2) the carrying case. Ifrequired, round your answers to two decimal places. If an amount iszero, enter zero "0".
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