Make or Bury covers needed each year follow Nylon fabric Walsh Corporation curre
ID: 2440315 • Letter: M
Question
Make or Bury covers needed each year follow Nylon fabric Walsh Corporation currenty makes the nylon mooring cover for its main product, a fiberglass boat designed for tournament bass fishing The costs of producing the 2,000 $325,000 Wood bactens Brass ctings Direct labor Variable manufacturing overhead 64,000 2.000 28,000 6,000 160,000 Calvin Company, a specialty fabricator of synthetic materials, can make the needed covers of comparabie quelity for $325 each FQB shipping point. Walsh would furnish its own tredemark insignia at a unit cost of $20. Transportation in would be $16 per unit, paid by Waish Corporation waish's chiefaccountant has prepared a cost anays that shows that on y 30% of fixed overhead could be oded if the covers are purcased The covers have been made in a remote section of Walsh's factory building using equipment for which no a ternate use is a e. Prepare a differential analysis showing whether or not you would recommend that the mooring covers be purchased from Calvin Company. If appropriate, use a negative sign with your answer to represent a net disadvantage answer. Do not use negative signs with any other answers using equipment for which no a ternate use is apparent in the foreseeable future Make or Buy Differential Analysis Cost to purchase covers Costs avoided by punchasing covers Direct maceries Direct labor Varable manufactuing overbeasd b Assuming thet the production capacity re eased by purenssngthe covers couid be devoted to a subcontract ng job for anoeher compeny that nected a contribution margin of s65.000, what maximum purchase price could Waish pay for the covers? Round answer to two decima places if applicable archExplanation / Answer
Answers
Cost of purchasing
[2,000 units x $325]
$ 650,000.00
Trademark Cost
[2,000 units x $20]
$ 40,000.00
Transportation cost
[2,000 units x $16]
$ 32,000.00
Total Cost to purchase covers
$ 722,000.00
Cost to purchase covers
$ 722,000.00
Costs avoided by purchasing covers:
Direct material [325000 + 64000 + 32000]
$ 421,000.00
Direct Labor
$ 128,000.00
Variable manufacturing overhead
$ 96,000.00
Fixed manufacturing overhead [160,000 x 30%]
$ 48,000.00
$ 693,000.00
Net advantage (disadvantage) to purchase alternative
$ (29,000.00)
---Let maximum price to be paid on purchase be $ x per unit.
Cost if 2000 units are produced
Direct material [325000 + 64000 + 32000]
$ 421,000.00
Direct Labor
$ 128,000.00
Variable manufacturing overhead
$ 96,000.00
Fixed manufacturing overhead
$ 160,000.00
Total cost to produce
$ 805,000.00
Cost if 2000 are purchased
Trademark Cost
$ 40,000.00
Transportation cost
$ 32,000.00
Fixed manufacturing overhead
$ 112,000.00
Additional contribution
$ (65,000.00)
Cost of purchasing ($ x per unit)
2000x
Total cost to be incurred if purchased
$ 119,000 + 2000x
Maximum price will be that price where Cost under both the above alternative becomes equal to each other:
Total cost to produce
$ 805,000
Cost of purchasing ($ x per unit)
$ 119,000 + 2000x
$ 805,000 = $ 119,000 + 2000x
x = (805000 - 119000) /2000
x = 686000/2000
x = $ 343 per unit
---Maximum price that can be paid to purchase = $ 343 per unit OR $ 686,000
Cost of purchasing
[2,000 units x $325]
$ 650,000.00
Trademark Cost
[2,000 units x $20]
$ 40,000.00
Transportation cost
[2,000 units x $16]
$ 32,000.00
Total Cost to purchase covers
$ 722,000.00
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