The Allen Company produces chairs. This year’s expected production is 30,000 units. Currently, Allen makes the upholstery for the chairs in its factory. Allen’s management accountant reports the following costs for the upholstery for the 30,000 chairs:

Allen has received an offer from an outside vendor to supply the upholstery for the chairs Allen requires at $23 per chair.

Required

1. Assume that if the outside vendor supplies the upholstery, the facility where the upholstery is currently made will remain idle. On the basis of financial considerations alone, should Allen accept the outside vendor’s offer at the anticipated volume of 30,000 chairs? Show your calculations.
2. For this question, assume that if the upholstery is purchased outside, the available unused facilities will be used to make pillows to match the chairs. Each pillow sells for $25 with a variable cost of $15.
No other costs would change and the company expects to sell 10,000 pillows. On the basis of financial considerations alone, should Allen make or buy the upholstery for their chairs, assuming that 30,000 chairs are produced (and sold)? Show your calculations.
3. The sales manager at Allen is concerned that the estimate of 30,000 chairs may be high and believes that only 24,000 chairs will be sold. Production will be cut back, freeing up work space. This space can be used to make 10,000 pillows whether Allen buys the upholstery or makes it in-house. On the basis of financial considerations  alone, should Allen purchase the upholstery from the outside vendor? Show your calculations.

Transcribed Image Text:

Direct materials Variable direct manufacturing labor Variable manufacturing overhead Variable inspection, setup, materials handling Allocated fixed costs of plant administration, taxes, and insurance Total costs Cost per Unit Costs for 30,000 Units $10.00 5.00 3.00 $300,000 150,000 90,000 120,000 105,000 $765,000