Question

Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $58 per unit. The company, which is currentl operating below full capacity, charges factory overhead to production at the rate of 38% of direct labor cost. The fully absorbed unit costs to produce comparable cases are expected to be as follows: Direct materials $29 Direct labor 21 Factory overhead (38% of direct labor) 7.98 Total cost per unit $57.98 If Companion Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated cases are expected to be 15% of the direct labor costs. a. Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If re round your answers to two decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) February 24 Make Carrying Buy Carrying Differential Effect Case (Alternative 1) Case (Alternative 2) on Income (Alternative 2) Sales Price Costs: Purchase price Direct materials per unit Direct labor per unit Variable factory overhead per unit Fixed factory overhead per unit Income (Loss)

Answer 1

Companion Computer Company

Differential Analysis

Make Carrying case (Alt. 1) or Buy Carrying case (Alt. 2)

February 24

		Make Carrying case (Alt. 1)	Buy Carrying case (Alt. 2)	Differential Effect on Income (Alt. 2)
(A)	Sales Price	_	_	_
	Costs:
	Purchase price	$0.00	$58.00	$58.00
	Direct Material per Unit	$29.00	$0.00	$(29.00)
	Direct Labor per Unit	$21.00	$0.00	$(21.00)
	Variable Factory overhead per Unit	$3.15	$0.00	$(3.15)
	Fixed Factory overhead per Unit	$4.83	$4.83	$0.00
(B)	Total cost per Unit	$57.98	$62.83	$(4.85)
(A)-(B)=(C)	Income (loss)	$(57.98)	$(62.83)	$4.85

It is advisable to make carrying cases.

It would beneficial to manufacture the carrying cases because the cost savings would be $4.85 per unit. Fixed factory overhead is same because it will continue whether the carrying cases are purchased or manufactured.