Old Camp Company manufactures awnings for its own line of tents. The company is

Question

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 11,000 awnings it needs for $20 each. Old Camp's costs to make the awning are $7 in direct materials and $6 in direct labor. Variable manufacturing overhead is 75 percent of direct labor. If Old Camp accepts the offer, $37,000 of fixed manufacturing overhead 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 Total 2. Should Old Camp continue to manufacture the awnings or should they purchase the awnings from the supplier? Manufacture Purchase 3. Assuming that the capacity released by purchasing the awnings allowed Old Camp to record a profit of $35,000, should Old Camp continue to manufacture or purchase the awnings? Manufacture O Purchase

Explanation / Answer

1)Complete the incremental analysis for the decision to make or buy the awnings in the table provided below. Make Buy Net Income Increase (Decrease) Direct Materials (11000 x $7) $77,000.00 $77,000.00 Direct Labor (11000 x $6) $66,000.00 $66,000.00 Variable OH (11000 x $6 x 75%) $49,500.00 $49,500.00 Fixed OH $37,000.00 $37,000.00 $0.00 Purchase Price (11000 x $20) $220,000.00 -$220,000.00 Total $229,500.00 $257,000.00 -$27,500.00 2) The Old Camp should continue to manufacture the awnings because purchasing the screens will cost the company an additional $27500 3) Make Buy Net Income Increase (Decrease) Total (Calculated Above) $229,500.00 $257,000.00 -$27,500.00 Opportunity Cost $35,000.00 $35,000.00 Variable OH $264,500.00 $257,000.00 $7,500.00 The Old Camp should purchase the awnings

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