Question

Jupiter Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $78 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$52
Direct labor	20
Factory overhead (40% of direct labor)	8
Total cost per unit	$80

If Jupiter 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 10% of the direct labor costs.

Required:

A. Prepare a differential analysis, dated July 19 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 "0". A colon (:) will automatically appear if required.

Labels
Cash flows from investing activities
Costs
Amount Descriptions
Direct materials per unit
Direct labor per unit
Fixed factory overhead per unit
Gain on sale of investments
Income (Loss)
Loss on sale of investments
Purchase price
Variable factory overhead per unit

Differential Analysis

Make Carrying Case (Alternative 1) or Buy Carrying Case (Alternative 2)

July 19

1		Make Carrying Case	Buy Carrying Case	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3
4
5
6
7
8
9

B. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

Assuming there were no better alternative uses for the spare capacity, it would __________ (Pick one | "not be advisable" OR "be advisable") to manufacture the carrying cases because the cost savings would be $4 per unit. Fixed factory overhead is _________ (Pick one | "relevent" OR "irrelevent") because it will continue whether the carrying cases are purchased or manufactured.

Answer 1

Answer A

1		Make Carrying Case	Buy Carrying Case	Differential Effect on Income
2		(Alternative 1)	(Alternative 2)	(Alternative 2)
3	Purchase price		$                       78	$                                       78
4	Direct materials per unit	$                   52		$                                      (52)
5	Direct labor per unit	$                   20		$                                      (20)
6	Variable factory overhead per unit	$                     2		$                                        (2)
7
8
9	Costs	$                   74	$                       78	$                                         4

Answer B

Assuming there were no better alternative uses for the spare capacity, it would be advisable to manufacture the carrying cases because the cost savings would be $4 per unit. Fixed factory overhead is irrelevent because it will continue whether the carrying cases are purchased or manufactured.

In case of any doubt, please comment.