Make or buy scenario: Eclipse computer company has been purchasing carrying case

Question

Make or buy scenario: Eclipse computer company has been purchasing carrying cases for its portable computers at a delivered cost of $86 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit cost to produce comparable carrying cases are direct materials $30 Direct Labor 40 Factory overhead (40% of direct labor) 16 Total cost per unit $ 86 If Eclipse Computer co, manufactures the carrying cases , fixed factory overhead cost not increase and variable factory cost associated with the cases are expected to be 15% of the direct labor costs. Prepare differential analysis, dated July 19, 2014 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying cases. I have completed the first line for you, please fill in the rest.

Explanation / Answer

Make carrying case Buy carrying case Differential effect on income Costs: Purchase price -86 -86 Direct materials per unit -30 0 30 Direct labor per unit -40 0 40 Variable factory overhead per unit -6 0 6 Fixed factory overhead per unit -10 -10 0 Income (Loss) -86 -96 -10

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