Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases

Question

Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $60 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 38% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows: Direct materials Direct labor Factory overhead (38% of direct labor) Total cost per unit If Fremont Computer Company manufactures the carrying cases, fixed factory overhead costs vwill not increase and variable factory overhead costs associated with the cases are expected to be 15% of the direct labor costs. $26 19 7.22 $52.22 a. Prepare a differential analysis dated September 30 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 "o". Use a minus sign to indicate a loss.. Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) September 30 Make Carrying Case (Alternative 1) Buy Carrying Case (Alternative 2) Differential Effect on Income (Alternative 2) Sales price Unit costs: Purchase price Direct materials Direct labor Variable factory overhead Foxed factory overhead Income (Loss) b. Assuming there were no better alternative uses for the spare capacity, it would this decision. to manufacture the carrying cases. Fixed factory overhead is to

Explanation / Answer

Fremont Computer Company Differential Analysis Make Carrying Case(Alt 1) or Buy Carrying Case(Alt 2) September 30th Make Carrying Case(Alt 1) Buy Carrying Case(Alt 2) Differential effect on Income(Alternative 2) a) Sale Price Unit Cost PurchasePrice $                                 60.00 $                                            (60.00) Direct Material $                                        26.00 $                                               26.00 Direct Labor $                                        19.00 $                                               19.00 Variable Factory Overhead=($19*15%) $                                          2.85 $                                                 2.85 Fixed Factory Overhead=($19*23%) $                                          4.37 $                                   4.37 Total cost per Unit $                                        52.22 $                                 64.37 $                                            (12.15) Cost of manufacturing carrying cases is lower than the cost of buying carrying cases. So it is beneficial for a company to continue manufacture . b) Assuming there were no better alternative uses for the spare capacity, it would be preferably to manufacture the carrying cases.Fixed factory overhead is not relevant to this decision.

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