Question

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 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 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"

Answer 1

Ans:

a.Differential Analysis
Make (Alternative 1) or Buy (Alternative 2) the carrying case
April-30
	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	$           -26.00	$ 0	$ 26.00
Direct labor per unit	$           -21.00	$ 0	$ 21.00
Variable factory overhead per unit	$             -2.94	$ 0	$ 2.94
Fixed factory overhead per unit	$             -4.62	$        -4.62	$              -
Total costs	$ -54.56	$      -66.62	$       -12.06
Workings:
Variable factory overhead per unit =21*0.14=2.94
Fixed factory overhead per unit=7.56-2.94=4.62
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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