Question

Unit costs:

Make-or-Buy Decision
Companion Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 per unit. The company, which is currently operating below full capacity, charges factory overhead
to production at the rate of 38% of direct labor cost. The total unit costs to produce comparable carrying cases are expected to be as follows:
Purchase price
Direct materials
Direct labor
Factory overhead (38% of direct labor)
Total cost per unit
If Companion 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 15% of the direct labor
costs.
a. Prepare a differential analysis dated February 24 to determine whether the company should Make Carrying Case (Alternative 1) or Buy Carrying Case (Alternative 2). If required, round your answers to two
decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign
Direct materials per unit
Direct labor per unit
Variable factory overhead per unit
Fixed factory overhead per unit
Total unit costs
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$25.00
16.00
6.08
$47.08
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Differential Analysis
Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)
February 24
Make Carrying
Buy Carrying
Case (Alternative 1) Case (Alternative 2)
0.00 ✓
0 X
16 X
240 X
3.68 X
-50.08 X
Locator=&inprogress-false
-56 ✔
-28.00 X
16 X
2.40 X
-9.60 X
Differential Effects
Alternative 2)
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Answer 1

Companion Computer Company should buy carrying cases instead of manufacturing. Buying saves $8.92 per unit compared to making, considering direct materials, labor, and variable factory overhead costs.

The information provided indicates the cost analysis for Companion Computer Company in deciding whether to make or buy carrying cases for its portable computers. Below is the differential analysis:

- Direct materials per unit: $25.00

- Direct labor per unit: $16.00

- Variable factory overhead per unit: $6.08 (15% of direct labor)

- Fixed factory overhead per unit: $0.00 (fixed costs do not change)

- Total unit costs: $47.08

Now, let's compare the costs for making and buying:

- Make Carrying Case (Alternative 1):

- Direct materials: $25.00

- Direct labor: $16.00

- Variable factory overhead: $6.08

- Fixed factory overhead: $0.00

- Total unit cost: $47.08

- Buy Carrying Case (Alternative 2):

- Purchase price: $56.00

- Total unit cost: $56.00

Differential Effects:

- Direct materials: $56.00 (Buy) - $25.00 (Make) = -$31.00

- Direct labor: $0.00 (Buy) - $16.00 (Make) = $16.00

- Variable factory overhead: $0.00 (Buy) - $6.08 (Make) = $6.08

- Fixed factory overhead: $0.00 (Buy) - $0.00 (Make) = $0.00

- Total Differential Cost: -$8.92 (indicating a cost savings if the company continues to buy)

Based on the differential analysis, it appears more cost-effective for Companion Computer Company to continue purchasing the carrying cases rather than manufacturing them. The total cost saving per unit is $8.92.