Jupiter Computer Company has been purchasing carrying cases for its portable com
ID: 2493593 • Letter: J
Question
Jupiter Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $70 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 fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
If Jupiter 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 15% of the direct labor costs.
Direct materials $45 Direct labor 20 Factory overhead (40% of direct labor) 8 Total cost per unit $73Explanation / Answer
the question is based on the concept of absorption of over heads. As the company is operating below normal capacity, the fixed overheads will not change irrsepective of whether the company manufactures carrying cases or not. while making decisions the varible costs and variable overheads play major role when there is no incurrence of further fixed over head costs.
FROM THE above calculation we can know by manufacturing cases by jupiter computers, they can have contribution of $2 for each case, as the company is operating below full capacity, there will not any additional fixed overheads for prodution, the contribution of carrying cases will absorb fixed over heads of $2 for every carrying case manufactured. so it is better to manufacture rather than purchasing from outside as long as there idle production capacity and the positive contribution resulting from manufacture.
COST OF MANUFACTURING CARRYING CASES AMOUNT $ DIRECT MATERIALS 45 DIRECT LABOUR 20 VARIABLE FACTORY OVER HEAD 15% OF DIRECT LABOR (20*15%) 3 TOTAL VARIABLE COST OF CARRYING CASES 68 PURCHASING PRICE FROM OUT SIDE 70 CONTRIBUTION OF CARRYING CASES ( 70-68) 2Related Questions
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