Old Camp Company manufactures awnings for its own line of tents. The company is currently operating at capacity and has received an offer from one of its suppliers to make the 10,000 awnings it needs for $18 each. Old Camp’s costs to make the awning are $7 in direct materials and $5 in direct labor. Variable manufacturing overhead is 80 percent of direct labor. If Old Camp accepts the offer, $32,000 of fixed manufacturing overhead currently being charged to the awnings will have to be absorbed by other product lines.
1. Prepare an incremental analysis for the decision to make or buy the awnings.
2. Should Old Camp continue to manufacture the awnings or should they purchase the awnings from the supplier?
3. Would your answer to requirement 2 changes if the capacity released by purchasing the awnings allowed Old Camp to record a profit of $22,000?