Question

Make-or-Buy Decision

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $24 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials	$8.00
Direct labor	12.00
Factory overhead (40% of direct labor)	4.80
Total cost per unit	$24.80

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 25% 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 an amount is zero, enter "0". If required, round your answers to two decimal places.

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 14362ffd5fdb04a_1	$fill in the blank 14362ffd5fdb04a_2	$fill in the blank 14362ffd5fdb04a_3
Direct materials	fill in the blank 14362ffd5fdb04a_4	fill in the blank 14362ffd5fdb04a_5	fill in the blank 14362ffd5fdb04a_6
Direct labor	fill in the blank 14362ffd5fdb04a_7	fill in the blank 14362ffd5fdb04a_8	fill in the blank 14362ffd5fdb04a_9
Variable factory overhead	fill in the blank 14362ffd5fdb04a_10	fill in the blank 14362ffd5fdb04a_11	fill in the blank 14362ffd5fdb04a_12
Fixed factory overhead	fill in the blank 14362ffd5fdb04a_13	fill in the blank 14362ffd5fdb04a_14	fill in the blank 14362ffd5fdb04a_15
Total unit costs	$fill in the blank 14362ffd5fdb04a_16	$fill in the blank 14362ffd5fdb04a_17	$fill in the blank 14362ffd5fdb04a_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

a
	Make Carrying Case	Buy Carrying Case	Differential Effect on Income
	(Alternative 1)	(Alternative 2)	(Alternative 2)
Costs:
Purchase price	0.00	24.00	-24.00
Direct materials	8.00	0.00	8.00
Direct labor	12.00	0.00	12.00
Variable factory overhead	3.00	0.00	3.00
Fixed factory overhead	1.80	1.80	0.00
Total unit costs	24.80	25.80	-1.00
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