Hart Computer Company has been purchasing carrying cases for its portable comput

Question

Hart Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $68 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 35% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be:

Direct Materials $25.00
Direct Labor $32.00
Factory overhead(35% of direct labor) $11.20
Total cost per unit $ 68.20

If Hart Computer company manufactures the carrying cases, fixed factory costs will not increase and variable factory overhead costs associated with the cases are expected to be 25% of the direct labor costs.

a. Prepare a differential analysis report, dated June 5,2008, for the make-or-buy decision.
b.On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.

Explanation / Answer

differential analysis report, dated June 5,2008: 1. If we buy the carryig case, it will cost $68. 2. If we make the Carrying case, we incur below costs: Direct Materials $25.00 Direct Labor $32.00 Var Factory OH (25% of direct labor) $8.00 ------------------------------------------------ Total Cost $65 Fixed OH of remaining 10% is not relevant for decision making as it will be incurred whether you make or buy. But by making the Carrying case, Hat will save $68-$65 = $3 per case. b.For above reasons, it is advisable to make the Carrying case for $65.

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