Fox Run Outfitters manufactures lightweight frames that it uses in several of its backpack products. Management is considering whether to continue manufacturing the frames or to buy them from an outside source. The following information is available. 

1. The company needs 14,000 frames per year. The frames can be purchased from an outside supplier at a cost of $20 per unit. 

2. The unit cost of manufacturing the frames is $29, computed as follows.

3. If the company decides not to manufacture the frames, it will eliminate all of the raw materials and direct labor costs, but will eliminate only 40 percent of the variable factory overhead costs.

4. If the frames are purchased from the outside source, machinery used in the production of frames will be sold at its book value. Accordingly, no gain or loss will be recognized. The sale of this machinery would also eliminate $8,000 in fixed costs associated with depreciation and taxes. No other reductions in fixed factory overhead will result from discontinuing the production of the frames.

Instructions
a. Prepare a schedule in the format illustrated in Exhibit 21–6 to determine the incremental cost or benefit of buying the frames from the outside supplier. Using this schedule, would you recommend that the company manufacture the frames or buy them from the outside source?

b. Assume that if the frames are purchased from the outside source, the manufacturing space previously used to produce them can be used to manufacture an additional 17,000 filters used in its portable water purifiers. The filters have an estimated contribution margin of $2 per unit. Manufacturing additional filters would have no effect on fixed factory overhead. Would this new assumption change your recommendation as to whether to make or buy the backpack frames? In support of your conclusion, prepare a schedule showing the incremental cost or benefit of buying the frames from the outside source and using the factory space to produce additional water purification filters.

Transcribed Image Text:

Direct materials. Direct labor ... Factory overhead: Variable Fixed ... Total manufacturing costs... Cost per unit ($406,000 14,000 units) $168,000 56,000 42,000 140,000 $406,000 $ 29