Buddy Pets has recently started to manufacture talking toy pets. The cost structure to manufacture 10,500 of these toy pets is as follows:

Direct materials ($31 per pet)		$325,500
Direct labour ($25 per pet)		262,500
Variable overhead ($13 per pet)		136,500
Allocated fixed overhead ($23 per pet)		241,500
Total		$966,000

Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $82 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 $126,000 of the fixed overhead cost (in making 10,500 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)
SalesDirect labourFixed overheadPurchase priceNet income / (loss)Direct materialsVariable overhead		$		$		$
Net income / (loss)Variable overheadFixed overheadDirect materialsSalesDirect labourPurchase price
Variable overheadFixed overheadDirect materialsPurchase priceSalesDirect labourNet income / (loss)
SalesPurchase priceNet income / (loss)Direct materialsFixed overheadVariable overheadDirect labour
Direct labourSalesVariable overheadPurchase priceFixed overheadDirect materialsNet income / (loss)
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 $189,500. (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)
Purchase priceVariable overheadDirect materialsNet incomeSalesDirect labourFixed overhead		$		$		$
Purchase priceFixed overheadDirect labourDirect materialsNet incomeVariable overheadSales
SalesVariable overheadNet incomePurchase priceDirect materialsFixed overheadDirect labour
SalesDirect materialsNet incomeDirect labourVariable overheadFixed overheadPurchase price
Purchase priceSalesDirect labourNet incomeDirect materialsVariable overheadFixed overhead
Total annual cost
LessAdd: Opportunity cost
Total cost		$		$		$

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

Buddy Pets should continue to makebuy the pets.