Question

Somerset Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $57 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 44% of direct labor cost. The unit costs to produce comparable carrying cases are expected to be as follows:

Direct materials $27

Direct labor 17

Factory overhead (44% of direct labor) 7.48

Total cost per unit $51.48

If Somerset 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 16% of the direct labor costs.

Question Content Area

a. Prepare a differential analysis dated April 30 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 "0".

Differential Analysis

Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)

April 30

Make

Carrying

Case

(Alternative 1) Buy

Carrying

Case

(Alternative 2)


Differential

Effects

(Alternative 2)

Unit costs:

Purchase price $fill in the blank f5728bf69052fef_1 $fill in the blank f5728bf69052fef_2 $fill in the blank f5728bf69052fef_3

Direct materials fill in the blank f5728bf69052fef_4 fill in the blank f5728bf69052fef_5 fill in the blank f5728bf69052fef_6

Direct labor fill in the blank f5728bf69052fef_7 fill in the blank f5728bf69052fef_8 fill in the blank f5728bf69052fef_9

Variable factory overhead fill in the blank f5728bf69052fef_10 fill in the blank f5728bf69052fef_11 fill in the blank f5728bf69052fef_12

Fixed factory overhead fill in the blank f5728bf69052fef_13 fill in the blank f5728bf69052fef_14 fill in the blank f5728bf69052fef_15

Total unit costs $fill in the blank f5728bf69052fef_16 $fill in the blank f5728bf69052fef_17 $fill in the blank f5728bf69052fef_18

Question Content Area

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.

Answer 1

a. Differential Analysis

Make Carrying Case (Alt. 1) or Buy Carrying Case (Alt. 2)

April 30

Make

Carrying

Case

(Alternative 1) Buy

Carrying

Case

(Alternative 2)

Differential

Effects

(Alternative 2)

Unit costs:

Purchase price $57 $fill in the blank f5728bf69052fef_2 -$57

Direct materials $27 $fill in the blank f5728bf69052fef_5 $27 - $fill in the blank f5728bf69052fef_5

Direct labor $17 $fill in the blank f5728bf69052fef_8 $17 - $fill in the blank f5728bf69052fef_8

Variable factory overhead $2.72 $fill in the blank f5728bf69052fef_11 $2.72 - $fill in the blank f5728bf69052fef_11

Fixed factory overhead $0 $fill in the blank f5728bf69052fef_14 $0 - $fill in the blank f5728bf69052fef_14

Total unit costs $51.72 $fill in the blank f5728bf69052fef_17 $51.72 - $fill in the blank f5728bf69052fef_17

b. Based on the information provided, it would be better to make the carrying cases, as the unit cost of $51.72 is less than the purchase price of $57. The fixed factory overhead is not relevant to this decision, as it will not change whether the company makes or buys the carrying cases, since the company is currently operating below full capacity.