Make-or-Buy Decision Matchless Computer Company has been purchasing carrying cas

Question

Make-or-Buy Decision Matchless Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $55 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 fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $30.00 Direct labor 22.00 Factory overhead (43% of direct labor) 9.46 Total cost per unit $61.46 If Matchless 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 12% of the direct labor costs. Hide a. Prepare a differential analysis, dated October 11, 2014, 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 zero "0". Differential Analysis Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2) October 11, 2014 Make Carrying Case (Alternative 1) Buy Carrying Case (Alternative 2) Differential Effect on Income (Alternative 2) Costs: Purchase price $ $ $ Direct materials per unit Direct labor per unit Variable factory overhead per unit Fixed factory overhead per unit Income (Loss) $ $ $ b. Assuming there were no better alternative uses for the spare capacity, it would to manufacture the carrying cases. Fixed factory overhead is to this decision.

Explanation / Answer

Since matchless computers is operating below capacity, the only relevant costs for the make or buy decision is the variable costs since the fixed costs will continue to be incurred.

per unit per unit per unit Total cost Make buy Purchase price $55.00 Direct Material $30.00 $30.00 Direct Labor $22.00 $22.00 Variable overhead (12% labor) $2.64 $2.64 Fixed overhead (31% labor) $6.82 $61.46 $54.64 $55.00 Saving in procuring from outside $0.36

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