P8-3A Make or Buy 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: 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 Dustin Company, a specialty fabricator of synthetic materials, can make the needed tops of comparable quality for $390 each, F.O.B. shipping point. Allen would furnish its own trademark insignia at a unit cost of $12. Transportation would be $18 per unit, paid by Allen Corporation. Allen's chief accountant has prepared a cost analysis that shows that only 20% of fixed overhead could be avoided if the tops are purchased. The tops have been made in a remote section of Allen's factory building, using equipment for which no alternate use is apparent in the foreseeable future. Required a. Prepare a differential analysis showing whether or not you would recommend that the convertible tops be purchased from Dustin Company. b. Assuming that the production capacity released by purchasing the tops could be devoted to a subcontracting job for another company that netted a contribution margin of $42,000, what maximum purchase price could Allen Corporation pay for the tops? c. Identify two important qualitative factors that Allen Corporation should consider in deciding whether to purchase the needed tops.

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

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P8-3A	Make or Buy
	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:



	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

	Dustin Company, a specialty fabricator of synthetic materials, can make the needed tops of comparable quality for $390 each, F.O.B. shipping point. Allen would furnish its own trademark insignia at a unit cost of $12. Transportation would be $18 per unit, paid by Allen Corporation.


	Allen's chief accountant has prepared a cost analysis that shows that only 20% of fixed overhead could be avoided if the tops are purchased. The tops have been made in a remote section of Allen's factory building, using equipment for which no alternate use is apparent in the foreseeable future.


	Required
	a. Prepare a differential analysis showing whether or not you would recommend that the convertible tops be purchased from Dustin Company.

	b. Assuming that the production capacity released by purchasing the tops could be devoted to a subcontracting job for another company that netted a contribution margin of $42,000, what maximum purchase price could Allen Corporation pay for the tops?


	c. Identify two important qualitative factors that Allen Corporation should consider in deciding whether to purchase the needed tops.

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