Question

Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $58 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	$27
Direct labor	21
Factory overhead (38% of direct labor)	7.98
Total cost per unit	$55.98

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 15% 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 "0". 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
Fixed factory overhead
Income (Loss)	$	$	$

Answer 1

	Make carrying case	buy carrying case	Differential effect on income
Sales price	$	$	$
Unit cost
Purchase price		58
Direct material	27
Direct labor	21
Variable factory overhead (15%X21)	3.15
Fixed factory overhead	0
Total cost	51.15	58	-6.85

from above we can conclude that if we purchase the carrying cases , our cost wil be more by $6.85 per unit i.e our income will reduce by $6.85 per unit of carrying cases.

Hence we should manufacture the carrying cases.

Note : fixed factory overhead are not considered in manufacturing option because as mentioned in question it will not increase if company manufactures the carrying cases. Hence irrelevant.