Make-or-Buy Decision Fremont Computer Company has been purchasing carrying cases

Question

Make-or-Buy Decision

Fremont Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $40 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 25% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

If Fremont 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 5% of the direct labor costs.

a. Prepare a differential analysis dated September 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. If an amount is zero, enter "0". If required, round your answers to two decimal places. Use a minus sign to indicate a loss.

b. Assuming there were no better alternative uses for the spare capacity, it would (Be advisable, Not be advisable) to manufacture the carrying cases. Fixed factory overhead is(Relevant, Irrelevant) to this decision.

Explanation / Answer

a Make Carrying Case (Alternative 1) Buy Carrying Case (Alternative 2) Differential Effect on Income (Alternative 2) Sales price 0 0 0 Unit costs: Purchase price 0 40 40 Direct materials 16 -16 Direct labor 20 -20 Variable factory overhead 1 -1 Fixed factory overhead 4 4 0 Income (loss) 41 44 3 b It would Be advisable to manufacture the carrying cases. Fixed factory overhead is Irrelevant to this decision.

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