Question

Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $40 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 25% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials Direct labor Factory overhead (25% of direct labor) Total cost per unit If Fremont Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs $16 20 $41 associated with the cases are expected to be 5% of the direct labor costs. a. Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If an amount is zero, enter ". If required, round your answers to two decimal places. Use a minus sign to indicate a loss. Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) September 30 Make Carrying Case (Aternative 1) Buy Carrying Case (Alteative 2) Differential Effect on Income (Alternative 2) Sales prioe Unit costs: Purchase price Direct materials Direct labor Variable factory overhead Fixed factory overhead Income (loss)

Answer 1

Differential Analysis
Make carrying case (Alternative 1) and buy carrying case (Alternative 2)
	Alternative 1	Alternative 2	Differential effect on net income (Alternative 2)
Purchase Price		40.00	(40.00)
Direct materials	16.00		16.00
Direct labor	20.00		20.00
Variable manufacture overhead	1.00		1.00
Fixed manufacture overhead	4.00	4.00	-
Total cost	41.00	44.00	(3.00)
Company should Make carrying case (Alternative 1 should be Choose.)
For make or buy decision, selling price of the product is irrelevant, here details of selling price not provided. It does not affect on the decision of buy or make.
				Total Manufacture overhead			5.00
Less: Variable manufacture overhead (20*5%)			1.00
Fixed manufacture overhead			4.00