Buddy Pets has recently started to manufacture talking toy pets. The cost structure to manufacture 13,200 of these toy pets is as follows:

Direct materials ($35 per pet)		$462,000
Direct labour ($29 per pet)		382,800
Variable overhead ($9 per pet)		118,800
Allocated fixed overhead ($23 per pet)		303,600
Total		$1,267,200

Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $84 per unit. Using incremental analysis, determine whether Buddy Pets should accept this offer under each of the following independent assumptions:

Prepare an incremental analysis. Assume that $118,800 of the fixed overhead cost (in making 13,200 of the toy pets) is avoidable. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Cost (Saving)
Fixed overheadVariable overheadPurchase priceSalesDirect labourDirect materialsNet income / (loss)		$		$		$
Net income / (loss)Direct materialsDirect labourFixed overheadSalesPurchase priceVariable overhead
Direct materialsDirect labourFixed overheadVariable overheadPurchase priceNet income / (loss)Sales
Net income / (loss)Direct materialsPurchase priceSalesDirect labourVariable overheadFixed overhead
Purchase priceVariable overheadSalesNet income / (loss)Fixed overheadDirect labourDirect materials
Total annual cost		$		$		$

Should Buddy Pets continue to make the pets or buy the pets?

Buddy Pets should

continue to makebuy

the pets.

Prepare an incremental analysis. Assume that none of the fixed overhead is avoidable. However, if the pets are purchased from Maxum, Buddy Pets can use the released productive resources to generate additional income of $192,600. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Cost (Saving)
Net incomeDirect labourSalesFixed overheadDirect materialsVariable overheadPurchase price		$		$		$
Purchase priceDirect labourFixed overheadVariable overheadSalesNet incomeDirect materials
Fixed overheadPurchase priceDirect labourVariable overheadSalesNet incomeDirect materials
SalesDirect labourDirect materialsNet incomeVariable overheadFixed overheadPurchase price
Net incomeDirect materialsVariable overheadFixed overheadDirect labourPurchase priceSales
Total annual cost
AddLess : Opportunity cost
Total cost		$		$		$

Should Buddy Pets continue to make the pets or buy the pets?

Buddy Pets should

buy or continue to make

the pets.