Companion Computer Company has been purchasing carrying cases for its portableco
ID: 2368761 • Letter: C
Question
Companion Computer Company has been purchasing carrying cases for its portablecomputers at a delivered cost of $68 per unit. The company, which is currently operatingbelow full capacity, charges factory overhead to production at the rate of 40% ofdirect labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows:
Direct materials $25.00
Direct labor 32.00
Factory overhead (40% of direct labor) $12.80
Total cost per unit $69.80
If Companion Computer Company manufactures the carrying cases, fixed factoryoverhead costs will not increase and variable factory overhead costs associated with thecases are expected to be 15% of the direct labor costs.
a. Prepare a differential analysis report, dated October 11, 2010, for the make-or-buy decision.
b. On the basis of the data presented, would it be advisable to make the carryingcases or to continue buying them? Explain.
Explanation / Answer
Buy
Make
Net income Increase/(Decrease)
Direct Material
0
25.00
(25.00)
Direct Labor
0
32.00
(32.00)
Variable Overhead
0
4.80
(4.80)
Purchase price
68.00
0
68.00
Total cost per unit
68.00
61.80
6.20
They should make the carrying cases, because net income would increase by $6.20 per unit.
Buy
Make
Net income Increase/(Decrease)
Direct Material
0
25.00
(25.00)
Direct Labor
0
32.00
(32.00)
Variable Overhead
0
4.80
(4.80)
Purchase price
68.00
0
68.00
Total cost per unit
68.00
61.80
6.20
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