Make-or-Buy Decision Companion Computer Company has been purchasing carrying cas

Question

Make-or-Buy Decision

Companion Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $57 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 45% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:

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 14% 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".

b. Assuming there were no better alternative uses for the spare capacity, it would be advisable to manufacture the carrying cases. Fixed factory overhead is irrelevant to this decision.

Direct materials $26 Direct labor 21 Factory overhead (45% of direct labor) 9.45 Total cost per unit $56.45

Explanation / Answer

Make Carrying Case (Alternative 1) Buy Carrying Case (Alternative 2) Differential Effect on Income (Alternative 2) Costs: Purchase price 57 -57 Direct materials per unit 26 26 Direct labor per unit 21 21 Variable factory overhead per unit 2.94 2.94 Fixed factory overhead per unit 6.51 6.51 0 Income (Loss) -56.45 -63.51 -7.06 b It would be advisable to manufacture the carrying cases. Fixed factory overhead is irrelevant to this decision.

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