Question

Instructions Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $67 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 50% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials Direct labor Factory overhead (50% of direct labor) 10 Total cost per unit $70 If Fremont Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 15% of the direct labor costs. Required: a. Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "O". A colon (;) will automatically appear if required. b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

Answer 1

a.

Differential Analysis
Make (Alternative 1) or Buy (Alternative 2) Carrying Case
September 30
	Make Carrying Case	Buy Carrying Case	Differential Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Sales price	0	0	0
Unit costs:
Purchase price		67	-67
Direct materials	40	0	40
Direct labor	20	0	20
Variable factory overhead (15% x $20)	3	0	3
Fixed factory overhead	7	7	0
Income (loss)	-70	-74	-4

b. Assuming there were no better alternative uses for the spare capacity, it would be advisable to manufacture the carrying cases. Fixed factory overhead is irrelevant to this decision.