Question

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 Matchless 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 February 24 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". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect 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)	$	$	$

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.

Answer 1

Ans:

a. Differential Analysis
Make (Alternative 1) or Buy (Alternative 2) the carrying case
Feb-24
	Make carrying case (Alternative 1)	Buy carrying case (Alternative 2)	Differential effect on cost
Sales price	$ 0	$ 0	$ 0
Costs:
Purchase price	$ 0	$      -62.00	$       -62.00
Direct material per unit	$           -29.00	$ 0	$ 29.00
Direct labor per unit	$           -22.00	$ 0	$ 22.00
Variable factory overhead per unit	$             -3.30	$ 0	$ 3.30
Fixed factory overhead per unit	$             -5.06	$        -5.06	$              -
Total costs	$ -59.36	$      -67.06	$         -7.70
Workings:
Variable factory overhead per unit =22*0.15=3.3
Fixed factory overhead per unit=8.36-3.3=5.06
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
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