Question 2

Buddy Pets has recently started to manufacture talking toy pets. The cost structure to manufacture 11,200 of these toy pets is as follows:

Direct materials ($35 per pet)		$392,000
Direct labour ($28 per pet)		313,600
Variable overhead ($10 per pet)		112,000
Allocated fixed overhead ($21 per pet)		235,200
Total		$1,052,800

Buddy Pets is approached by Maxum Inc., which offers to make the toy pets for $86 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 $123,200 of the fixed overhead cost (in making 11,200 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)
Purchase priceFixed overheadDirect materialsSalesDirect labourNet income / (loss)Variable overhead		$		$		$
SalesPurchase priceFixed overheadNet income / (loss)Direct materialsDirect labourVariable overhead
Direct materialsFixed overheadDirect labourVariable overheadPurchase priceSalesNet income / (loss)
Net income / (loss)Purchase priceFixed overheadSalesDirect materialsDirect labourVariable overhead
SalesVariable overheadDirect materialsFixed overheadPurchase priceNet income / (loss)Direct labour
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 $213,000. (Enter savings with a negative sign preceding the number e.g. -15,000 or parenthesis, e.g. (15,000).)

Cost		Make		Buy		Cost (Saving)
Variable overheadDirect materialsFixed overheadNet incomeDirect labourPurchase priceSales		$		$		$
Direct labourNet incomeDirect materialsVariable overheadFixed overheadPurchase priceSales
Direct materialsSalesFixed overheadNet incomeDirect labourVariable overheadPurchase price
Fixed overheadDirect materialsDirect labourNet incomeVariable overheadPurchase priceSales
SalesPurchase priceVariable overheadDirect materialsNet incomeDirect labourFixed overhead
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.