Walsh Corporation currently makes the nylon mooring cover for its main product, a fiberglass boat designed for
Question:
Walsh Corporation currently makes the nylon mooring cover for its main product, a fiberglass boat designed for tournament bass fishing. The costs of producing the 2,000 covers needed each year follow:
| Nylon fabric | $320,000 | |||
| Wood battens | 64,000 | |||
| Brass fittings | 32,000 | |||
| Direct labor | 128,000 | |||
| Variable manufacturing overhead | 96,000 | |||
| Fixed manufacturing overhead | 170,000 |
Calvin Company, a specialty fabricator of synthetic materials, can make the needed covers of comparable quality for $290 each, F.O.B. shipping point. Walsh would furnish its own trademark insignia at a unit cost of $20. Transportation in would be $15 per unit, paid by Walsh Corporation.
Walsh’s chief accountant has prepared a cost analysis that shows that only 30% of fixed overhead could be avoided if the covers are purchased. The covers have been made in a remote section of Walsh’s 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 mooring covers be purchased from Calvin Company.
b. Assuming that the production capacity released by purchasing the covers could be devoted to a subcontracting job for another company that netted a contribution margin of $64,000, what maximum purchase price could Walsh pay for the covers?
Expert Answer:
a To determine whether Walsh Corporation should purchase the mooring covers from Calvin Company we n... View the full answer
