Question

Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 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:

Direct materials	$28
Direct labor	21
Factory overhead (45% of direct labor)	9.45
Total cost per unit	$58.45

If Matchless 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 February 24 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 "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Sales Price	$	$	$
Costs:
Purchase price	$	$	$
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Income (Loss)	$	$	$

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a. For the make and buy alternatives provide the unit costs. Use percentage to separate variable and fixed costs. Determine the differential effect on income of the revenues, costs, and income (loss) by subtracting alternative 1 from alternative 2.

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.

Answer 1

Ans:

A.

	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effect on Income (Alternative 2)
Cost:
Purchase price		56	(56)
Direct materials per unit	28		27
Direct labor per unit	21		21
Variable factory overhead per unit (21*14%)	2.94		2.52
Fixed factory overhead per unit (21*(45%-14%))	6.51	6.51
Income (Loss)	58.45	62.51	(4.06)

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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