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

Question

Make-or-Buy Decision

Diamond Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $59 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 Diamond 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.

Prepare a differential analysis dated February 24 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If an amount is zero, enter zero "0". If required, round your answers to two decimal places. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Direct materials $35.00 Direct labor 18.00 Factory overhead (40% of direct labor) 7.20 Total cost per unit $60.20

Explanation / Answer

Make Carrying case Buy Carrying case Differential Effect on Costs Sales price 0 0 Costs: Purchase price 59 -59 Direct materials per unit 35 35 Direct labor per unit 18 18 Variable factory overhead per unit 2.7 2.7 Fixed factory overhead per unit 0 0 0 Total Costs 55.7 59 -3.3 It is recommended to make

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