EX 25-7 Make-or-buy decision OBJ. 1 Diamond Computer Company has been purchasing

Question

EX 25-7 Make-or-buy decision OBJ. 1 Diamond Computer Company has been purchasing carrying caseoperating ers at a purchase price of $59 per unit. The company, which is for its portable comput- company, which is currently operating below to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying to be as follows: Direct materials Direct labor Factory overhead (40% of direct labor) Total cost per unit $35.00 18.00 7.20 $60.20 If Diamond Computer Company manufactures the carrying cases d costs will not increase and variable factory overhead costs associated with the cases fixed factory over- hea 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. b.- , On the basis of the data presented, would it be advisable to malke the ca ing cases or to continue buying them? Explain. rry-

Explanation / Answer

Notes & Assumptions :

Conclusion : From the above computations we can observe that, the cost is decreased by $3.3 in Alternative 1. Hence it is advisable to go for manufacturing the product, instead of buying the product.

Differential Analysis on 24th February

Notes & Assumptions :

1. While evaluating the cost benefit analysis between the Make or Buy Decisions , relevant cost plays crucial rule.
2. In the given case Direct Material Cost and Direct Labor , Variable OH relevant Costs and Fixed OH is irreverent costs,as it fixed irrespective of the production levels.
3. Furthere , we can assume that there is no opportunity gain available from spare capacity.

Amount $ Make Carrying Case Buy Carrying Case Differential effect of Income Marginal Cost Statement Alternative 1 Alternative 2 Diff = (Alt1) - (Alt2) 1 Direct Material Price 35 35 2 Direct Labor 18 18 3 Variable OH @ 15% of Labor 2.7 2.7 4 Purchase Price 59 -59 Total 55.7 59 -3.3

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