Alam Computer Company has been purchasing carrying cases for itsportable compute

Question

Alam Computer Company has been purchasing carrying cases for itsportable computers at a delivered cost of $68 per unit. Thecompany, which is currently operating below full capacity, chargesfactory overhead to production at the rate of 35% of direct laborcost. The fully absorbed unit costs to produce comparable carryingcases are expected to be:

DM          $25.00
DL          $32.00
Factory O/H
(35% ofDL)                 $11.20
Total Cost per unit       $68.20

If Alam Computer Company manufactures the carrying cases, fixedfactory overhead costs will not increase and variable factoryoverhead costs associated with the cases are expected to be 25% ofthe DL costs.

a. Prepare a differential analysis report, dated June 5, 2008, forthe make-or-buy decision.

b. On the basis of the data presented, would it be advisable tomake the carrying cases or to continue buying them? Explain.

Explanation / Answer

Purchase price of carrying case -$68.00

(DM $25 + DL $32 + VFo/h (25%DL)* $8= $65.00

Cost savings frommanufacturing carrying case ($68 - $65) = $3.00 percase

* Variable Factory Overhead ($32.00x 25%)

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