Reference no: EM133071158
Question - 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 152,000
Dustin Company, a specialty fabricator of synthetic materials, can make the needed tops of comparable quality for $400 each, F.O.B. shipping point. Allen would furnish its own trademark insignia at a unit cost of $16. Transportation in would be $28 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 $41,600, what maximum purchase price could Allen Corporation pay for the tops?
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