Make or Buy Allen Corporation currently makes the nylon convertible top for its main product, a

fiberglass boat designed especially for water skiing. The costs of producing the 1,500 tops needed

each year follow:

Nylon fabric. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $270,000

Aluminum tubing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000

Frame fittings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,000

Variable manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000

Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000

Dustin Company, a specialty fabricator of synthetic materials, can make the needed tops of comparable

quality for $390 each, F.O.B. shipping point. Allen would furnish its own trademark insignia at a unit

cost of $12. Transportation would be $18 per unit, paid by Allen Corporation.

Allens chief accountant has prepared a cost analysis that shows that only 20% of fixed overhead

could be avoided if the tops are purchased. The tops have been made in a remote section of Allens

factory building, using equipment for which no alternate use is apparent in the foreseeable future.

Required

a. Prepare a differential analysis showing whether or not you would recommend that the convertible

tops be purchased from Dustin Company.

b. Assuming that the production capacity released by purchasing the tops could be devoted to a

subcontracting job for another company that netted a contribution margin of $42,000, what maxi-

mum purchase price could Allen Corporation pay for the tops?

c. Identify two important qualitative factors that Allen Corporation should consider in deciding

whether to purchase the needed tops.