Question

Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $61 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 36% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$24
Direct labor	20
Factory overhead (36% of direct labor)	7.2
Total cost per unit	$51.2

If Somerset 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.

a. Prepare a differential analysis dated April 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 "0".

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
April 30
	Make Carrying Case (Alternative 1)	Buy Carrying Case (Alternative 2)	Differential Effects (Alternative 2)
Unit costs:
Purchase price	$	$	$
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Total unit costs	$	$	$

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 relevant  to this decision.

Answer 1

a.

Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
Apr-30
	Make	Buy
	Carrying	Carrying
	Case	Case	Differential
	(Alternative 1)	(Alternative 2)	Effects
			(Alternative 2)
Unit costs:
Purchase price	0	61	-61
Direct materials	24	0	24
Direct labor	20	0	20
Variable factory overhead	3	0	3
Fixed factory overhead	4.2	4.2	0
Total unit costs	51.2	65.2	-14

Total factory overhead = $7.2 per unit -

Variable factory overhead = 15% of direct labor cost

= 20 x 15%

= $3

Fixed factory overhead = Total factory overhead -Variable factory overhead

= 7.2-3

= $4.2

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 not relevant  to this decision.