Question

In: Accounting

Make-or-Buy Decision Somerset Computer Company has been purchasing carrying cases for its portable computers at a...

Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $58 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 36% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials $25
Direct labor 18
Factory overhead (36% of direct labor) 6.48
Total cost per unit $49.48

If Somerset 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.

a. Prepare a differential analysis dated April 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If required, round your answers to two decimal places. If an amount is zero, enter "0".

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
April 30
Make
Carrying
Case
(Alternative 1)
Buy
Carrying
Case
(Alternative 2)


Differential
Effects
(Alternative 2)
Unit costs:
Purchase price $ $ $
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Total unit costs $ $ $

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

Solutions

Expert Solution

a] Make Buy Increase/ (Decrease) in Net income
Purchase price $               58.00 $       (58.00)
Direct material $              25.00 $         25.00
Direct labor $              18.00 $         18.00
Variable manufacturing overhead [18*15%] $                 2.70 $           2.70
Fixed manufacturing overhead [6.48-2.70]= $                 3.78 $                 3.78 $                -  
Total unit costs $              49.48 $               61.78 $       (12.30)
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.

Related Solutions

Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 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 unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $29 Direct labor 16 Factory overhead (40% of direct labor) 6.4 Total cost per unit $51.4 If Fremont Computer...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 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 unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $25 Direct labor 22 Factory overhead (40% of direct labor) 8.8 Total cost per unit $55.8 If Fremont Computer...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 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 unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $29 Direct labor 16 Factory overhead (40% of direct labor) 6.4 Total cost per unit $51.4 If Fremont Computer...
Make-or-Buy Decision Matchless Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 per unit. The company, which is currently 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 carrying cases are expected to be as follows: Direct materials $29 Direct labor 22 Factory overhead (38% of direct labor) 8.36 Total cost per unit $59.36 If...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 41% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $28 Direct labor 20 Factory overhead (41% of direct labor) 8.2 Total cost per unit $56.2 If Fremont Computer...
Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $59 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 41% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $28 Direct labor 19 Factory overhead (41% of direct labor) 7.79 Total cost per unit $54.79 If...
Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a...
Make-or-Buy Decision Companion Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $57 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 45% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $26 Direct labor 21 Factory overhead (45% of direct labor) 9.45 Total cost per unit $56.45 If...
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price...
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 36% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $26 Direct labor 21 Factory overhead (36% of direct labor) 7.56 Total cost per unit $54.56 If Somerset Computer Company manufactures...
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price...
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $62 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 unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $28 Direct labor 16 Factory overhead (40% of direct labor) 6.4 Total cost per unit $50.4 If Somerset Computer Company manufactures...
Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price...
Fremont 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 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 Fremont Computer Company manufactures...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT