The Carrying Company sells carrying cases. Currently the Sun Light Case is purch

Question

The Carrying Company sells carrying cases. Currently the Sun Light Case is purchased at a cost of $65 per unit. This case is used for their lap top computer. The company is currently operating below full capacity and they charge factory overhead to production at a rate of 40% of direct labor cost. The current expected cost of the company to make a comparable handbag is:

The company has also determined that if they manufacture the Sun Light Case, the fixed overhead cost will not increase and variable factory overhead cost associated with the case are expected to be 12% of the direct labor cost.

Required:

A. Prepare a differential analysis to determine whether the company should make or buy.

B. Using your analysis explain if it is advisable to make the case or to continue to buy.

Directc Material $30 Direct Labor 25 Factory overhead (includes 40% of direct labor) 10 Total Cost per unit $65

Explanation / Answer

A. Prepare a differential analysis to determine whether the company should make or buy.

b) Company should make the case because manufacturing cost is lower then buying cost.. and if company make the case then net operating income will increase by (65-58) = $7 per case

Make Buy Direct material 30 Direct labour 25 Variable factory overhead (25*12%) 3 Purchase price 65 Total cost 58 65

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