I need help on this:
Allen Coporation 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 need 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, FOB 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.
Allen's chief accountant has prepared a cost analysis that shows that only 20% of fixed overhead could be avoided if the topos are purchased. The tops have been made in a remote section of Allen's factory building, using equipment for which no alternative use is apparent in the forseeable future.
Required
a) Prepare a differential analysis showing wheter or not you would recommend that that 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 maximum 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.