valuc: .61 points Old Camp Company manufactures awnings for its own line of tent

Question

valuc: .61 points Old Camp Company manufactures awnings for its own line of tents. The company is currently operating at capacity and has received an offer from one of its suppliers to make the 14,000 awnings it needs for $31 each. Old Camp's costs to make the awning are S18 in direct materials and S7 in direct labor. Variable manufacturing overhead is 70 percent of direct labor. If Old Camp accepts the offer, $48,000 of fixed manufacturing averhead currently being charged to the awnings will have to be absorbed by other product lines. Required: 1. Complete the incremental analysis for the decision to make or buy the awnings in the table provided below. Net Income Increase (Decrease) Make Buy Direct Materials Direct Labor Variable OH Fixed OH Purchase Price -L

Explanation / Answer

Incremental analysis for decision to make or buy the awings :

WORKING NOTE 1 :

direct material = total awnings * cost of direct material

= 14000 * 18

= 252000

WORKING NOTE 2 :

direct labor = total awning * cost of direct labor

= 14000 * 7

= 98000

WORKING NOTE 3 :

variable overhead = 70 % of direct labor

= 98000 * 70%

= 68600

WORKING NOTE 4 :

purchase price = total awning * purchasing cost

= 14000 * 31

= 434000

THE TOTAL MANUFACTURING COST IS LESS THAN THE PURCHASE PRICE.

IT SHOULD CONTINUE TO MANUFACTURING

particulars make buy net income [increses or (decrease)] direct material (W N 1) 252000 252000 direct labor(W N 2) 98000 98000 variable overhead (W N 3) 68600 68600 fixed overhead 48000 48000 0 total manufacturing cost 418600 purchase price (W N 4) 434000 (434000) TOTAL 466600 482000 (15400)

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