Question

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 Companion 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 13% of the direct labor costs. a. Prepare a differential analysis, dated October 11, 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 zero "0". Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) October 11 Make Carrying Case (Alternative 1) Buy Carrying Case (Alternative 2) Differential Effect on Income (Alternative 2) 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

Statement showing Differential Income.

	Make	Buy	Differential Effect on Income
Cost of Purchase	-	59.00	59.00
Direct Material	28.00		(28.00)
Direct Labour	19.00		(19.00)
Variable Factory Overhead	2.47		(2.47)
Total Cost	49.47	59.00	9.53

Therefore,

Assuming there were no better alternative uses for the spare capacity, it would manufacture the carrying cases as it will save 9.53 of the cost.

Also please note that Fixed factory overhead is not considered above because it is not relevant in decision making.

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