Buddy Pets has recently started to manufacture talking toy pets. The cost structure to manufacture 10,600 of these toy pets is as follows:

Direct materials ($32 per pet)		$339,200
Direct labour ($29 per pet)		307,400
Variable overhead ($11 per pet)		116,600
Allocated fixed overhead ($20 per pet)		212,000
Total		$975,200

Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $85 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 $106,000 of the fixed overhead cost (in making 10,600 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		Net Income Increase (Decrease)
Fixed overheadDirect labourDirect materialsVariable overheadSalesNet income / (loss)Purchase price		$		$		$
SalesDirect materialsDirect labourPurchase priceFixed overheadNet income / (loss)Variable overhead
Direct labourDirect materialsNet income / (loss)Variable overheadPurchase priceSalesFixed overhead
Net income / (loss)Purchase priceSalesFixed overheadVariable overheadDirect labourDirect materials
Direct labourFixed overheadNet income / (loss)Direct materialsVariable overheadPurchase priceSales
Total annual cost		$		$		$

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

Buddy Pets should buycontinue to make 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 $175,800. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Net Income Increase (Decrease)
SalesFixed overheadVariable overheadDirect materialsPurchase priceDirect labourNet income		$		$		$
Fixed overheadSalesDirect labourVariable overheadDirect materialsNet incomePurchase price
Fixed overheadDirect materialsSalesVariable overheadDirect labourPurchase priceNet income
SalesDirect materialsDirect labourPurchase priceVariable overheadNet incomeFixed overhead
Direct labourDirect materialsNet incomeVariable overheadPurchase priceFixed overheadSales
Total annual cost
AddLess: Opportunity cost
Total cost		$		$		$

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

Buddy Pets should buycontinue to make the pets.