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O ld Camp Company manufactures awnings for its own line of tents. The company is currently operating...

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Accounting

O

ld Camp Company manufactures awnings for its own line of tents.The company is currently operating at capacity and has received anoffer from one of its suppliers to make the 12,000 awnings it needsfor $22 each. Old Camp’s costs to make the awning are $10 in directmaterials and $6 in direct labor. Variable manufacturing overheadis 75 percent of direct labor. If Old Camp accepts the offer,$40,000 of fixed manufacturing overhead currently being charged tothe awnings will have to be absorbed by other productlines.  

Required:
1. Complete the incremental analysis for the decision tomake or buy the awnings in the table provided below.

  

MakeBuy

Net Income

Increase

(Decrease)

Direct Materials  
Direct Labor
Variable OH
Fixed OH
Purchase Price
Total



2. Should Old Camp continue to manufacture theawnings or should they purchase the awnings from thesupplier?

Manufacture
Purchase



3. Assuming that the capacity released bypurchasing the awnings allowed Old Camp to record a profit of$22,000, should Old Camp continue to manufacture or purchase theawnings?

Purchase
Manufacture

Answer & Explanation Solved by verified expert
4.0 Ratings (501 Votes)

Requirement 1

Net decrease in income = $18000

Make Buy Net income Increase (Decrease)
Direct Materials $1,20,000.00 $    1,20,000.00
Direct Labor $   72,000.00 $       72,000.00
Variable OH $   54,000.00 $       54,000.00
Fixed OH $                       -  
Purchase Price $2,64,000.00 $ (2,64,000.00)
Total $2,46,000.00 $2,64,000.00 $     (18,000.00)

Requirement 2

Answer-----Manufacture.

Manufacturing cost is less than purchase cost so its better to manufacture.

.

Requirement 3

Answer---- Purchase

There will be additional profit of $4000 if awnings are purchased

Make Buy Net income Increase (Decrease)
Direct Materials $ 1,20,000.00 $    1,20,000.00
Direct Labor $    72,000.00 $        72,000.00
Variable OH $    54,000.00 $        54,000.00
Fixed OH $                       -  
Purchase Price $ 2,64,000.00 $ (2,64,000.00)
Total $ 2,46,000.00 $ 2,64,000.00 $     (18,000.00)
Benefit to be achived on manufacturing $   (22,000.00) $        22,000.00
Total relevant cost $ 2,46,000.00 $ 2,42,000.00 $          4,000.00

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