Buddy Pets has recently started to manufacture talking toy pets. The cost structure to manufacture 13,400 of these toy pets is as follows:

Direct materials ($34 per pet)		$455,600
Direct labour ($30 per pet)		402,000
Variable overhead ($9 per pet)		120,600
Allocated fixed overhead ($24 per pet)		321,600
Total		$1,299,800

Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $83 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 $120,600 of the fixed overhead cost (in making 13,400 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)
Net income / (loss)Direct materialsSalesDirect labourVariable overheadFixed overheadPurchase price		$		$		$
Direct labourDirect materialsVariable overheadNet income / (loss)Fixed overheadPurchase priceSales
SalesPurchase priceNet income / (loss)Direct materialsDirect labourVariable overheadFixed overhead
Fixed overheadVariable overheadDirect materialsPurchase priceDirect labourSalesNet income / (loss)
Variable overheadFixed overheadDirect labourDirect materialsPurchase priceSalesNet income / (loss)
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 $207,600. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Cost (Saving)
Direct materialsNet incomeDirect labourVariable overheadFixed overheadPurchase priceSales		$		$		$
Variable overheadDirect materialsFixed overheadPurchase priceNet incomeSalesDirect labour
Variable overheadDirect labourSalesDirect materialsNet incomePurchase priceFixed overhead
Net incomeDirect materialsDirect labourVariable overheadFixed overheadPurchase priceSales
SalesFixed overheadPurchase priceVariable overheadDirect materialsNet incomeDirect labour
Total annual cost
LessAdd : Opportunity cost
Total cost		$		$		$

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

Buddy Pets should

buycontinue to make

the pets.