EX 24-7 Make or buy decision Eclipse Computer has been purchasing carrying cases

Question

EX 24-7 Make or buy decision

Eclipse Computer has been purchasing carrying cases for its portable computers at a delivery cost of $65 per unit. The company, which is currently operating below full capacity, charges factory overhear to production at a rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

If Eclipse Computer Co, manufactures the carrying cases, fixed factory overhead cost will not increase and variable factory overhead cost associated with the cases are expected to be 15% of the direct labor cost.

a. Prepare a differential analysis dated July 19,2014, to determine whether the company should make (alternative 1) or buy (alternative 2) the carrying case.

Explanation / Answer

Differential analysis dated July 19,2014

Make (alternative 1) or Buy (alternative 2) the carrying case

Make (alternative 1) Buy (alternative 2) differential effect on cost

cost to purchase - $65 per unit ($65) Alt 1

Variable factoryoverhead 0.15 0.40 (0.25) Alt 1

Therefore, Eclipse computer should start manufacturing the carrying case , because it is lower in cost as compare to purchase the carrying case

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