Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $89 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 60% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:
| Direct materials | $59 |
| Direct labor | 20 |
| Factory overhead (60% of direct labor) | 12 |
| Total cost per unit | $91 |
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 10% of the direct labor costs.
| Required: | |
| a. | Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. |
| b. |
On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain. |
| Labels | |
| Cash flows from investing activities | |
| Unit costs | |
| Amount Descriptions | |
| Direct labor | |
| Direct materials | |
| Fixed factory overhead | |
| Gain on sale of investments | |
| Income (loss) | |
| Loss on sale of investments | |
| Purchase price | |
| Sales price | |
| Variable factory overhead |
a. Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required.
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Differential Analysis |
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Make (Alternative 1) or Buy (Alternative 2) Carrying Case |
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September 30 |
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Make Carrying Case |
Buy Carrying Case |
Differential Effect on Income |
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(Alternative 1) |
(Alternative 2) |
(Alternative 2) |
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Solution a:
| Differential Analysis - Making Carrying Case (alt 1) or Buying Carrying Case (Alt2) | |||
| Particulars | Making Carrying Case (Alt 1) | Buying Carrying Case (Alt 2) | Financial advantage (Disadvantage) of buying (Alternative 2) |
| Sales price | $0.00 | $0.00 | $0.00 |
| Costs: | |||
| Purchase Price | $0.00 | -$89.00 | -$89.00 |
| Direct material per unit | -$59.00 | $0.00 | $59.00 |
| Direct Labor per unit | -$20.00 | $0.00 | $20.00 |
| Variable overhead per unit | -$2.00 | $0.00 | $2.00 |
| Fixed factory overhead per unit | -$10.00 | -$10.00 | $0.00 |
| Income (Loss) | -$91.00 | -$99.00 | -$8.00 |
Solution b:
It is advisable company should make the carrying cases.
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