Question

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 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 September 30 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.
b.	On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

a. Prepare a differential analysis dated September 30 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.

Differential Analysis

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

September 30

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
10

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 ? to manufacture the carrying cases because the cost savings would be $4 per unit. Fixed factory overhead is ? because it will continue whether the carrying cases are purchased or manufactured.

Answer 1

A.   

Differential Analysis Make (Alt. 1) or Buy (Alt. 2) Carrying Case September 30
	Make	Buy	Differential
	Carrying	Carrying	Effect
	Case	Case	on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Sales price	$ 0	$ 0	$ 0
Unit costs:
Purchase price	0.00	-78.00	-78.00
Direct materials	-52.00	0.00	52.00
Direct labor	-20.00	0.00	20.00
Variable factory overhead	-2.001	0.00	2.00
Fixed factory overhead	-6.002	-6.00	0.00
Income (loss)	-$80.00	-$84.00	-$ 4.00

1. $20.00 x 10%

2. $8.00 - $2.00

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 irrelevant because it will continue whether the carrying cases are purchased or manufactured