Make-or-Buy Decision
Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $59 per unit. The company, which is currently
operating below full capacity, charges factory overhead to production at the rate of 43% of direct labor cost. The unit costs to produce comparable carrying cases are
expected to be as follows:
Direct materials
Direct labor
Factory overhead (43% of direct labor)
Total cost per unit
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 13% 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
Unit costs:
$25
16
6.88
$47.88
Purchase price
Direct materials
Direct labor
Variable factory overhead
Fixed factory overhead
Buy
Make
Carrying
Carrying
Case
Case
(Alternative 1) (Alternative 2)
0000
100000
Differential
Effects
(Alternative 2)