Question

# Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price...

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) \$ \$ \$

 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.