Question

Make-or-Buy Decision Matchless Technologies Company has been purchasing carrying cases for its portable tablets at a delivered cost of $56 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 39% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $28.00 Direct labor 17.00 Factory overhead (39% of direct labor) 6.63 Total cost per unit $51.63 If Matchless Technologies 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 14% of the direct labor costs. a. Prepare a differential analysis report for the make-or-buy decision. Enter your final answer as a positive amount if it represents a net cost savings; enter a negative amount if it represents an increase in cost. MATCHLESS TECHNOLOGIES COMPANY Manufacture Carrying Case Differential Analysis Report Purchase price of carrying case Differential cost to manufacture carrying case: Direct materials Direct labor Variable factory overhead Cost savings from manufacturing carrying case

Answer 1

IF company manufacture carrying case: Variable factory overhead 14% of direct labor cost I.e. $17 X 0.14 = $2.38 If company decides to manufacture carrying case then also the fixed factory overhead will not increase therefore only variable portion of factory overhead is considered in calculation of make or buy. Matchless Technology Company Manufacture Carrying Case Differential Analysis Report $56 Purchase price of carrying case: Differential cost for carrying case Direct Material Direct Labor Variable factory overhead $28 $17 $47.38 $2.38 Cost saving from manufacturing carrying case: ($56 - $47.38) $8.62