### Differential Analysis for Make or Buy DecisionThe objective is to determine whether to purchase convertible tops from Dustin Company or continue making them in-house.#### Step-by-Step Analysis:1. **Identify Costs to Purchase Tops**: - Cost related to purchasing the convertible tops from an external supplier.2. **Costs Avoided by Purchasing Tops**: - **Direct Materials**: Savings from not using materials in production. - **Direct Labor**: Savings from not employing labor for production. - **Variable Manufacturing Overhead**: Savings on costs that vary with production volume. - **Fixed Manufacturing Overhead**: Typically, these are not significantly affected by the decision.3. **Calculate Net Advantage/Disadvantage**: - Subtract the avoided costs from the purchase cost to identify any financial advantage or disadvantage. - Represent a net disadvantage with a negative sign.#### Supporting Diagram:- **Table: Make or Buy Differential Analysis**| **Make or Buy Differential Analysis** | ||------------------------------------------------------|----------|| **Cost to purchase tops:** | || **Costs avoided by purchasing tops:** | || - Direct materials | $ || - Direct labor | $ || - Variable manufacturing overhead | $ || - Fixed manufacturing overhead | || **Net advantage (disadvantage) to purchase alternative** | $ |### Further Consideration:- **Opportunity Cost Scenario**: - If production capacity is outsourced, it can be redirected to a different subcontracting job. - Example: Earning a contribution margin of $42,000. - Query: What maximum price can Allen Corporation pay for the tops, factoring in this opportunity?**Note:** Ensure to round financial calculations to two decimal places.By following this structured approach, a clear financial picture can be obtained for a make-or-buy decision, aiding in strategic decision-making. **Allen Corporation Production and Cost Analysis****Overview:**Allen Corporation currently manufactures nylon convertible tops for its main product, a fiberglass boat designed specifically for water skiing. The company requires 1,500 tops annually. Here's a breakdown of the production costs:- **Nylon fabric:** $270,000- **Aluminum tubing:** $96,000- **Frame fittings:** $24,000- **Direct labor:** $162,000- **Variable manufacturing overhead:** $30,000- **Fixed manufacturing overhead:** $180,000**Outsourcing Option:**Dustin Company, a specialist in synthetic materials, can produce equivalent tops at $390 each. Additional costs include:- **Trademark insignia:** $12 per unit- **Transportation:** $18 per unit (paid by Allen Corporation)**Financial Considerations:**Allen’s chief accountant determined that only 20% of the fixed overhead would be recoverable if they stop production in favor of outsourcing. The current production uses equipment with no foreseeable alternate use and takes place in a remote section of the factory.**Task:**Conduct a differential analysis to determine the feasibility of purchasing tops from Dustin Company. Use negative signs for any cost savings in your analysis.

It is the process of making decisions that involve the management of costs to achieve long-term…

Allen Corporation currently makes the nylon convertible top for its main product, a fiberglass boat designed especially for water skiing. The costs of producing the 1,500 tops needed each year follow:

Allen Corporation currently makes the nylon convertible top for its main product, a fiberglass boat designed especially for water skiing. The costs of producing the 1,500 tops needed each year follow:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A-2
How should I prepare a differential analysis showing whether or not I would recommend that the convertible tops be purchased from Dustin Company?
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