Everlasting Corp has been purchasing an assembly, Assembly W for $18.90 each. Ev

Question

Everlasting Corp has been purchasing an assembly, Assembly W for $18.90 each. Everlasting is currently operating at 70% of capacity and no significant increase in production is anticipated in the near future. The cost of manufacturing an assembly of Assembly W, determined by absorption costing methods, is estimated as follows: Direct materials $11.25 Direct labor 4.50 Variable factory overhead 1.12 Fixed factory overhead 3.15 Total $20.02 Develop a differential analysis report, dated March 12 of the current year, on the decision to make or buy Assembly W .

Explanation / Answer

Differential analysis is to compare two or more alternatives for the purpose of taking a decision. Generally, for differential analysis both revenues and costs need to be considered. But here we have only costs. So, Everlasting Corp should choose an alternative which has less cost.

The cost of the Assembly W to purchase is $ 18.90

The cost of manufacturing Assembly W is $ 20.02

Fixed factory overhead is incurred only when it is manufactured internally and not when purchased. Comparing the total cost of purchase and manufacturing, lower is the purchase cost of the Assembly W.

Hence Everlasting Corp has to buy Assembly W.

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