Question

Make-or-Buy Decision

Somerset 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 39% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$28
Direct labor	20
Factory overhead (39% of direct labor)	7.8
Total cost per unit	$55.8

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 14% 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	$fill in the blank 60edbf024073fad_1	$fill in the blank 60edbf024073fad_2	$fill in the blank 60edbf024073fad_3
Direct materials	fill in the blank 60edbf024073fad_4	fill in the blank 60edbf024073fad_5	fill in the blank 60edbf024073fad_6
Direct labor	fill in the blank 60edbf024073fad_7	fill in the blank 60edbf024073fad_8	fill in the blank 60edbf024073fad_9
Variable factory overhead	fill in the blank 60edbf024073fad_10	fill in the blank 60edbf024073fad_11	fill in the blank 60edbf024073fad_12
Fixed factory overhead	fill in the blank 60edbf024073fad_13	fill in the blank 60edbf024073fad_14	fill in the blank 60edbf024073fad_15
Total unit costs	$fill in the blank 60edbf024073fad_16	$fill in the blank 60edbf024073fad_17	$fill in the blank 60edbf024073fad_18

b. Assuming there were no better alternative uses for the spare capacity, it would   to manufacture the carrying cases. Fixed factory overhead is   to this decision.

Answer 1

Differential analysis
			Make	Buy	Differential effect
Unit cost:
Purchase price		0	56	-56
Direct material		28	0	28
Direct labour		20	0	20
variable factory oh		2.8	0	2.8
Fixed factory oh		0	0	0
Total Unit cost		50.8	56	-5
Assuming there were no better alternative use,
it would be recommended to manufacture the carrying cases. Fixed factory oh is irrelevant to the decision.