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 $57 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 43% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

If Fremont 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 12% of the direct labor costs.

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 "0". Use a minus sign to indicate a loss..

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

Direct materials $24 Direct labor 21 Factory overhead (43% of direct labor) 9.03 Total cost per unit $54.03

Explanation / Answer

Company should prefer making instead of Buying the product

Differential Analysis Make Buy Differential in Making over Buy Sales price NA NA NA Unit costs: Purchase price 57.00 Direct materials 24.00 Direct labor 21.00 Variable factory overhead 2.52 Fixed factory overhead 0.00 Total Cost 47.52 57 9.48 Net Income Sales-47.52 Sales-57 Note: Sales price of the product is not given in Question Note: Fixed Overhead cost are allocable and unavoidable cost. So they are ignored for calculation(Sunk Cost) Note: As given in the Question, there is no use of spare capacity. Note: Variable Factory OH are 12% of Direct labor cost(21*12%=2.52)

Company should prefer making instead of Buying the product

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