41 442 Problem 1 (20 points): The Amity Shoe Company is planning to introduce a coordinating handbag to its existing product line. Management must decide whether they will make the handbag or buy it from an outside supplier. An outside supplier has offered to make the handbag for $95 per bag. At 10,000 handbags per year, a preliminary analysis of costs shows the following: Per Bag $ 45.00 $ 10,000 Bags 450,000 Direct Labor 23.00 230,000 11.00 110,000 Building Depreciation 9.50 95,000 Common/Allocated Fixed Overhead 6.50 65,000 Direct Materials Variable Overhead If the handbag is manufactured internally, the company will have to purchase new equipment and hire a production supervisor, which will require fixed costs of $40,000 in addition to the costs listed above. No other fixed costs will change. The company will utilize existing space for the new product, but if the handbags are purchased from an outside supplier, the space will generate annual rental income of $150,000. Required: a. Prepare an analysis to determine whether the Amity Shoe Company should make the handbags or buy them from the outside supplier. Include in your analysis the impact on Amity's overall net operating income from making or buying the product. (14 points) b. On the basis of the data presented, would it be advisable to make or buy the handbags? Explain. (2 points)